Q1 2024 Webster Financial Corp Earnings Call
Good morning, and welcome to the Webster Financial's first quarter 2024 earnings call.
Please note this event is being recorded.
Speaker Change: I would now like to introduce Webster's director of Investor Relations.
Lynn Harton introduced the call.
Lynn Harton: Mr. Herman Please go ahead.
Lynn Harton: 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.
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 that Webster Bank Dot com for the Q&A portion of the call. We ask that each participant ask just one question and one follow up before returning to the queue I'll now turn it over to Webster Financial's, CEO and chairman John CLO.
Thanks, gentlemen, good morning, and welcome to Webster Financial Corporation's first quarter 2024 earnings call. We appreciate you joining us this morning.
I will provide remarks on our high level results and operations before turning it over to Glenn to cover our financial results in greater detail.
We're off to a solid start this year, having achieved a number of significant accomplishments both strategically and financially.
Glenn: I first want to provide some color around initiatives that solidify webster's commitment to our clients communities and colleagues as these have been and continue to be core to our company values.
Glenn: In the fourth quarter Western launched the your home program of special purpose credit program offering down payment assistance and flexible credit requirements to help expand homeownership opportunities for low to moderate income first time homebuyers. The your home program is the most recent component of our broad community investment strategy, a multi year commitment to expanding access.
As to capital, providing loans investments technical assistance and financial services to individuals and small businesses in LMI neighborhoods.
We're also launching four new finance labs in the coming weeks in partnership with local nonprofits. The Webster financed labs initiative provides technology and programming to create financial empowerment opportunities for young people by the end of this year, we will have deployed over $1 $7 million into nine labs under this initiative.
Our colleagues shared his commitment to service last year Webster volunteers gave nearly 17000 hours of their time to nearly 500 community organizations across our footprint.
Glenn: These are just a few examples of how Webster and our colleagues demonstrate our commitment to our values and our communities.
Turning to our financial performance on slide two on an adjusted basis for the quarter, we generated a return on average assets of $1, two 6% and our return on tangible common equity of 17, 9%. Our adjusted EPS was $1 35, we are pleased to grow client deposits by $1 eight.
And use those funds to redeem brokered deposits.
Mr challenging growth environment for the industry, we grew loans at 7% or one 2% when adjusting for the transfer of $240 million of loans to held for sale.
Our $1 6 billion in funded loan originations this quarter were driven by high quality C&I Cree categories, including fund banking and public sector finance and Cree and property types with solid operating dynamics, our efficiency ratio was 45% in line with the low to mid $40 range, we expect to operate in.
Glenn: For the year.
Our interest income performance was softer than originally anticipated at a number of factors led to lower than expected loan yields and we saw our deposits continue to reprice higher, albeit at a moderated rate. Despite these dynamics, we still anticipate that NII for the full year will be in the lower range of the guidance we provided in January.
We are assuming loan demand and credit quality of that loan demand cooperate.
Glenn: Structurally and longer term, we should continue to generate returns near the top of our peer group given the strategic advantage provided by our funding profile and business mix and the operating flexibility. We have created in terms of our liquidity and capital positions, we anticipate the ability to generate a return on assets in the range of one 3% and our.
Return on tangible common equity in excess of 18% for the full year 'twenty four and beyond our recently closed acquisition of a major us augment our competitive position on the next slide we provided the overview of the <unk> as a reminder of the business fundamentals now that they are officially a subsidiary of Webster.
<unk> is a particularly unique and exciting opportunity as a company provides a valuable service for its members and provides webster with low cost fast growing deposits that add significant fee income to describe the business in brief Amit drove administers recipients funds for medical claims settlement via a proprietary technology platform.
And service teams.
<unk> is already illustrating its growth potential as it has grown to $870 million in deposit balances relative to $805 million in deposit balances when we announced the acquisition in December it is our expectation that <unk> will grow deposits at 25% CAGR over the next five years before considering potential benefit.
It's from expanding existing partnerships, new market penetration or medical cost inflation.
Slide four which many of you are familiar with now highlights our funding diversity and now officially incorporates a matrix.
As you will see on subsequent slides, we've combined the metros with HSA Bank and a segment, we've named healthcare financial services with the segment reporting to our talented president and COO Luis Nazi Ani for.
For the foreseeable future, we will continue to provide business specific performance measures for both <unk> and HSA Bank.
Before turning it over to Glenn Let me touch on overall credit and more specifically Cree consistent with industry trends, we have seen negative risk rating migration and a return to pre pandemic credit metrics. We continue to proactively monitor our overall loan portfolio and we complete deep dives on targeted segments frequently while trend.
<unk> point to continued pressure on credit performance, excluding office, we haven't seen any concentrated or correlated problem areas with respect to any particular geography industry sector or product type.
On slide five we provide incremental information on our commercial real estate portfolio as it continues to be a focal point of investors in our higher for longer interest rate environment.
Our commercial real estate portfolio is diversified by geography and product type is conservatively underwritten has continued to perform well from an asset quality perspective.
In its entirety, our commercial real estate portfolio has a weighted average origination LTV of 56% and an amortizing debt service coverage ratio of one five times.
<unk> loans are one 5% of the portfolio with non accruals of just 10 basis points.
As rent regulated multifamily lending has been in focus this quarter, we provided some of the attributes of our portfolio on this slide as well as you can see in the incremental detail. We provide here are modestly sized portfolio is granular was underwritten the conservative ltvs and debt service coverage ratios and has limited.
Charities in the next two years. Additionally, a majority of the book was underwritten following housing stability Act passed in 2019, therefore, our expectations for the performance of those properties incorporates the unfavorable effects of this legislation on property cash flows.
In this category. The average loan size is $3 5 million, we have only seven exposures greater than $15 million and our largest rent regulated multifamily loans is now $49 million.
Given the underwriting of the loans and client selection the credit performance of this portfolio has been solid as illustrated by just.
10 basis points in classified loans and non accruals.
We've also refreshed statistics on our office exposure on this page, where I will point out that we continue to reduce the size of our portfolio.
We're actively working the portfolio given sector pressures I would note that our New York City office exposure is a manageable $217 million.
In addition to the information here there are two additional slides at the front of the supplement to this presentation that provides significant detail on our overall credit portfolio highlighting the diversity of the portfolio in terms of property type and geography.
Accordingly, we have been disciplined in terms of hold levels over time as there are relatively few tall trees in terms of single point exposures across our various portfolios are larger exposures have a stronger weighted average risk rating as you would expect and we currently have no classified exposures in the greater than 50 million Cree category.
With that I'll turn it over to Glenn to cover our financials in more detail.
Thanks, John and good morning, everyone I'll start on slide six with our GAAP and adjusted earnings for the first quarter, we reported GAAP net income to common shareholders of $212 million with diluted earnings per share of $1 23 on an adjusted basis, We reported net income to common shareholders of 233 million and diluted EPS.
A $1 35.
The largest component of the adjustments was in addition to the estimated FDIC special assessment of $12 million, a onetime tax adjustment of $11 million and $3 million of Dimitrios closing costs. In addition, our securities repositioning loss was more than offset by an MSR sale.
It is notable that there were no sterling related merger charges. This quarter and this will continue to be the case.
Next I'll review the balance sheet trends beginning on slide seven.
Total assets were <unk> 76 billion at period end up $1 2 billion from the fourth quarter, our security balances were up $250 million relative to the fourth quarter. The yield on our portfolio increased 29 basis points linked quarter to 364% via the combination of growth reinvestment of cash flows and three <unk>.
$88 million in restructuring executed this quarter.
Loans were up $373 million, driven by commercial categories and reflective of opportunities to gain market share.
While total deposits were flat we grew core deposits $1 5 billion in retail Cds $350 million, which was offset by a decline in brokered deposits.
As John noted and you can see on this slide we have aligned the mitre and HSA Bank for segment presentation purposes, while still providing the same data on HSA bank that we have historically.
The loan to deposit ratio was 84% in the range of where we expect to operate over the next few quarters.
<unk> increased $1 billion as we use them for liquidity purposes, given the managed decline in broker deposits.
Capital levels remained strong common equity tier one ratio was 10, 5% and our tangible common equity ratio was seven 5%.
Both lower than prior quarter, primarily as a result of the <unk> acquisition.
Tangible book value decreased to $30 22 per common share, reflecting the impact of the <unk> acquisition and a small increase in <unk>.
Security losses and.
Glenn: In a steady interest rate environment, we anticipate a $100 million of unrealized security losses would accrete back into the capital annually.
Loan trends are highlighted on slide eight.
Total loans were up roughly 700 $373 million or 7% on a linked quarter basis, we reclassified $240 million of payroll finance and factoring loans to held for sale, we expect to execute on the sale in the near future without the reclassification loan growth would have been closer to one 2%.
Linked quarter or approximately 5% annually.
Growth was driven by commercial real estate, where we had the opportunities to add new relationships and lower risk asset classes, including $275 million in multifamily and $424 million in general commercial real estate categories.
Yield on our portfolio was flat relative to prior quarter as a result of a shift in mix offsetting higher loan origination yields float.
Floating and periodic loans were 59% of total loans at quarter end.
We provide additional detail on deposits on slide nine we grew our core deposits $1 5 billion in retail Cds $350 million this quarter, given the strength of our core deposit growth, we reduced brokered deposits. The net effect was effectively flat total deposits on a linked quarter basis.
When combined transactional and low cost long duration healthcare financial services deposits compromised, 46% of our deposit base.
DDA balances were down $520 million relative to the prior quarter two thirds of the decline was driven by clients moving excess cash balances to higher yielding money market accounts with the other third related to specific client transaction activity.
Our total cost of deposits was up just eight basis points to 223 basis points. This quarter as the pace of deposit repricing continues to slow.
For the month of March our deposit cost was 224 basis points increases were the result of clients opting for higher yielding products as well as renewals in the CD portfolio.
Accumulative cycle to date total deposit beta is now 41%.
On slide 10, we rolled forward our deposit beta assumptions to incorporate the second quarter during which we expect our cycle to date beta to reach 42% as a result of lagged repricing impact and a continued higher rate environment.
Moving to slide 11, we highlight our reported to adjusted income statement compared to our adjusted earnings for the prior period overall adjusted net income was down $18 million relative to prior quarter net interest income was down $3 million from prior quarter. This was a result of higher funding costs and lower day, count partially offset by higher <unk>.
Glenn: Earning asset yields.
Just in noninterest income was up $17 million.
Adjusted expenses were up $22 million and the provision increased $9 5 million excluding.
Excluding adjustments our tax rate was 27% this quarter up from 19, 5% in the fourth quarter.
Glenn: Our efficiency ratio was 45%.
On slide 12, we highlight net interest income, which declined $3 million or 6% linked quarter. The decline was related to lower net interest margin and day count.
Glenn: The net interest margin was down seven basis points to 335 basis points. As a result of increased funding costs, which were partially offset by higher asset yields.
Interest rate hedges also contributed modestly to the decline we recognized $11 million in cost this quarter versus $9 million last quarter.
As John highlighted NIM was below our expectations as the macro environment made it challenging to grow a higher spread assets that meet our risk criteria.
Our yield on earning assets increased five basis points over the prior quarter with loan yields flat and securities portfolio up 29 basis points.
As previously noted we repositioned $388 million of securities in the first quarter. This will improve our securities yield by four basis points in the second quarter.
Pace of deposit repricing continues to moderate and was up just eight basis points total liability costs were up 11 basis points we.
We have provided detail on our hedging program on slide 27 in the supplement to this presentation, which reviews the bank's asset sensitivity.
On slide 13, we highlight noninterest income, which was up $17 million versus prior quarter on an adjusted basis $11 million of the increase was driven by our healthcare financial services segment was $6 million driven by the seasonal increases in growth in HSA bank and $5 million due to the addition of our metros.
An additional $5 million of the increase was attributed to noncash swing the credit valuation adjustment. The remaining drivers were related to fully events commercial loan and other deposit fees.
Noninterest expenses on slide 14, we reported adjusted expenses of $321 million up $22 million from the prior quarter.
$10 million of the increase came from healthcare financial services with $7 million driven by a matrix operating expense and intangibles and $3 million due to seasonality and account growth at HSA Bank <unk>.
Remaining growth in expenses were related to seasonal increases in payroll tax and benefit cost annual merit and performance based incentives.
Slide 15 details components of our allowance for credit losses, which was up relative to prior quarter.
After recording $37 million and net charge offs, we incurred a $43 million loan provision.
Of which 38 million was attributable to macro and credit factors and $5 million of which was attributable to loan growth.
As a result, our allowance coverage to loans increased to 126 basis points from 125 basis points last quarter.
Slide 16 highlights our key asset quality metrics on the upper left nonperforming assets increased 70 million relative to prior quarter with nonperforming loans now representing 56 basis points of total loans commercial classified loans as a percent of commercial loans increased to 224 basis points from 182 basis points as <unk>.
<unk> loans increased by $183 million on an absolute basis.
Classified loan increase was concentrated in C&I portfolio across diverse industries.
<unk> loan ratio remains well below webster's pre pandemic level.
Net charge offs on the upper right totaled $37 million or 29 basis points of average loans on an annualized basis consistent with last quarter's level.
On slide 17, we maintained strong capital levels, all capital levels remain at or above our internal targets. Our common equity tier one ratio was 10, 5% and our tangible common equity ratio was seven 2% tangible book value was $30 22 a share.
I'll wrap up my comments on slide 18, with our outlook for 2024. The outlook includes the impact of our metros, which closed in January and directly impacts deposits interest income fees and expenses.
We expect loans to grow around 5% for the full year towards the lower end of our prior guide growth will continue to be driven by our commercial business with more of a tilt to C&I relative to CRE categories.
We are reiterating our deposit growth in the 5% to 7% range with growth in the commercial bank full relationship deposits retail deposits Interlink EMEA chose and corporate deposits.
We expect net interest income of roughly $2 4 billion on a non FTE basis, which is at the low end of our prior guide. So those modeling net interest income on an FTE basis, I would add roughly $65 million for the outlook.
Our net interest income assumes two decreases to the fed funds rate with one in September and the other in December.
Glenn: Noninterest income continues to be forecasted in the range of $3 $75 million to $400 million.
Adjusted expenses continue to be in the range of one three to $1 $32 5 billion. Our efficiency ratio is expected to be in the low to mid 40% range. We expect the effective tax rate of 21%.
Of course, we will remain prudent managers of capital our long term common equity tier one ratio remains at 10, 5% with that I'll turn it over back to John closing remarks.
Thanks, Glenn to follow up on one point and our outlook, while we have maintained our longer term 10, 5% common equity tier one target I anticipate we will run it closer to 11% in the near term to medium term given the increased uncertainty generated by our higher for longer bias.
Think wed like to have incremental optionality in our pocket and that would be prudent.
Glenn: Additionally, given higher capital levels and areas for which we see the greatest opportunities for loan growth for the remainder of the year, we anticipate that commercial real estate relative to our total capital levels should decline over the next four to six quarters. Our intent is to bring crude concentration to approximately 250% of tier one capital plus reserves.
With a longer term target closer to 200% as we approach the $100 billion asset size threshold.
Glenn: There are many more industry headwinds that tailwind as we work our way through 2024, but I continue to be very confident in our ability to navigate the current landscape both offensive Lee and defensively.
Priority strong capital levels and disciplined credit management will continue to take care of our clients and deepen those client relationships across business lines, we have a diverse funding profile and our loan to deposit ratio in the mid eighties, providing us with significant flexibility and optionality on the funding side finally, our efficient operating model and unique businesses.
It allow us to continue to provide better than peer returns consistently over time.
Finally, as Youre, all aware Glen recently and for me and our board of directors of his intent to retire we've kicked off a comprehensive search for his successor in partnership with Spencer Stuart There's been broad interest in the role and we are confident that we will find a terrific person to fill some big shoes Glen will in all likelihood be with us for at least the next earnings call.
I'll save my farewell remarks for July as all you know Glenn has been an invaluable asset to me and to the bank for more than a decade and he has shined over the last five years through a pandemic a transformational merger and the industry events of last March.
You all for joining us today, and Eric Glen and I will open the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of.
Matthew M. Breese: Matthew Breese with Stephens.
Please go ahead.
Hey, good morning, everybody. Good morning, Matt I was hoping to start just on the NIM and NII if.
If I look at where we are this quarter versus the guide suggests that at some point this year kind of a material snapback in the quarterly cadence of NII I was hoping you could just help me better understand the rest of the year in terms of NII.
Matt: Or do you expect that snap back to occur either on an NII basis, our NIM basis. Thank you.
Speaker Change: Yes, So let me start and then John you can add some color to that I mean, I think we look at it.
A couple of drivers there, Matt the first being loans.
John: And we're still guiding toward 5% loan growth. So if you think about on average.
We're probably talking about $1 four to $1 five an average loans on a year over year basis, and so we'll get the benefit of that likewise on the investment portfolio will get the full year benefit of the restructuring we did in the fourth quarter.
And the AD that we did in the fourth quarter of $1 1 billion as well as the restructuring we did in the first quarter.
We continue to see opportunity.
John: In the securities portfolio on cash flow basis, where we will have probably about 500 million.
<unk> that will reprice will probably pick up 300 basis points on that and then likewise on the fixed rate loan portfolio. Although it was somewhat softer in the first quarter.
Think that we'll probably get about $800 million a quarter on a fixed rate loan portfolio will probably pick up about 200 basis points on that.
These are the tailwind on the opposite side, we continue to see pressure on deposits and so I think our deposit costs as you saw in the first quarter creeped up by eight basis points. It was more moderate than we've seen in previous quarters, but I think as you look through the cycle you would expect to see deposit costs.
Continue to peak in the second and third quarter, and so that will detract.
John: From some of the gain that we get on both the loan growth the investments and the repricing of fixed rate.
Assets.
Yes, Matt I mean, I would just say, obviously, we're trying desperately not to over promise and under deliver thats not our style over over seven years.
First quarter was interesting in that we had back ended loan growth, we had very little loan growth in sponsor and specialty we're starting to see some more activity. There. So our loan yields were lower.
John: The average loans were lower and some of our expectations of repricing of the portfolio that Glenn mentioned that we had expected and this higher for longer environment didn't occur because we had a much lower level of prepay and refinance and repricing activity in the book, We also had a short term.
The mix shift in <unk>.
John: Posits, which we think will rebound a bit and we get the full benefit of HSA endometrial going forward. So I think if you add what Glenn just gave specifically with respect to opportunities for higher NII from the securities portfolio. The moves we made from a more favorable deposit mix.
From standard loan growth, where we see there being more contribution from are generally higher yielding loans.
That's why we haven't moved that besides going to the low end of the original range. We provided that's why we've kind of said, we think we're going to be approximately around that $2 4 billion. If dynamics continue to change wildcard on prepayments and other things, obviously will mix up the guidance, but it's our best view right now quite frankly.
I appreciate all that and the next one was just on credit.
John: All in all the credit metrics look pretty solid still but quarter over quarter change was notable you had mentioned there is nothing specific that was driving everything I. Appreciate if there is any sort of common threads, particularly in the C&I book.
And then John you had mentioned kind of.
John: Getting to a 200% CRE concentration over time.
Something similar hold true for the reserve, which looks a little light versus your $100 billion bank peers as well.
Yes, I mean, there's a whole bunch to unpack there.
Speaker Change: So I would say from a from a credit perspective, you kind of nailed it.
If you look at all of the credit metrics of annualized charge offs in the quarter or really sort of.
In line with what Youre seeing in the industry similar to what we had last quarter.
Sure.
The percentage increase in classified and non accruals looked high but if you look at our absolute numbers.
Speaker Change: Below what Webster Bank reported pre pandemic at 12, 31, 2019, So I think youre right to say the absolute levels are still not kind of eye popping. We are seeing negative risk rating migration and I think it's consistent with those who have reported.
Thus far and I think as I mentioned in my comments I think we believe there'll be more pressure not less pressure on credit as we work our way through whatever this I think pretty modest cycle.
We will be.
We haven't really seen we had a kind of a broad contribution on the classifieds and the non performers actually skewing a little bit more towards C&I and Cree I think we've been really out in front on Cree, but the only way I can characterize I would say.
The only industry segment that we have seen.
Speaker Change: Some negative trending in is health care services, but we think fundamentally that industry. An area has really good fundamental dynamics going forward otherwise, it's kind of idiosyncratic one off so in equipment finance deal a middle market transaction healthcare services deal of food and beverage company So real.
Just kind of one offs and only a handful of loans that actually drove the increase in those categories. So we are not sounding the alarm everywhere, Jason is doing a terrific job of doing deep dive. So I really kind of just think it's a broad deterioration consistent what you've seen we've seen throughout the industry with respect to the pre concentration.
Thank your calculation, Matt will you do you have us in the $2 82 to 85 range or something.
Speaker Change: If we keep that portfolio generally flat and we do have some payoffs and some roll off coming up as we move forward.
Giving us an opportunity to originate healthy really good structured commercial real estate loans, which by the way, we're making the best loans. We've made now in non office and rent regulated multifamily because there arent as many market participants so we're getting better yields and better structure, but if you see us accrete capital back that we lost in the <unk>.
Speaker Change: <unk> acquisition, and you'll see us managing that the six quarter $2 50 target is not.
Significantly difficult to imagine while we're while we're growing the balance sheet I do think over time.
Speaker Change: The reality is over the next three years as we start to approach category. Four we'll have to continue to have commercial real estate would be less of a concentration overall I do think over time.
Looking at capital levels, a combination of capital levels and reserves those things will probably tick up I think we can do that in an orderly fashion given the makeup of our balance sheet. We don't have a lot of consumer unsecured we don't have cards. So it's not just.
The fact that we're in this new category I think it's also the makeup of the balance sheet. So.
Going forward, it's not going to be a significant drag on earnings, but youll, probably see us evolve from a capital and reserve perspective, as we move forward depending on the makeup of the balance sheet.
Perfect I appreciate all the color I'll leave it there. Thank you. Thank you.
Your next question comes from the line of Chris Mcgratty with Keefe Bruyette.
And wood.
Please go ahead.
Hey, good morning.
Christopher Edward McGratty: Hey, Chris.
John a question on normalized charge offs, you're kind of in this 25 to 30 basis point range.
How do you view this environment in.
Christopher Edward McGratty: In the context of normal.
Yes, I mean, I think in the benign credit environment, leading up to the pandemic.
Christopher Edward McGratty: We were in the 20 basis point range give or take.
Last few quarters.
To be completely transparent obviously, we had a decent portion of the charge offs were related to proactive balance sheet management loan sales. This quarter. The vast majority of the charge offs were what I would call kind of liquidated charge offs. They happen they werent related to two asset sales. So I do think that there's more pressure.
Sure on credit.
I think anything below 40 basis points in terms of cycle 40, 50 basis points in commercial is still absolutely observable by our cash flows and our earnings power.
I think what I would tell you right now is we're seeing across the industry.
<unk>.
The beginning of what I believe will be a shallow.
Christopher Edward McGratty: Credit correction.
And the way, we look at things going forward Chris.
Christopher Edward McGratty: Still think our provision.
<unk> for the full year, it's kind of what we're building and even looking at our risk rating migration and our classified assets in our non accruals in the outcomes of the loss given default on loans that it may be troubled so.
30 basis points I would say is slightly higher it doesn't portend to have a huge credit correction.
Could it go higher in any one quarter I think you've heard a lot of people say in this earnings cycle. When you have a large commercial loan portfolio that thing can bounce around a little bit because you really can't control what happens and if you have a couple of larger charge offs. It could bounce around from that 30 basis points, but I kind of feel like we're in heightened alert.
The ultimate overall metrics still are better than pre pandemic or around pre pandemic and it's a question of whether or not. This is this is deeper so could you see charge offs go higher in in certain quarters, Yes would I be surprised if charge offs were lower next quarter I wouldn't be so I hope that gives you just some color there.
They were thinking.
That's good thank you for that and I guess my follow up would be you guys have been early on loan sales didn't do anything really meaningful this quarter.
To get to that CRA targets, you are talking about it.
Christopher Edward McGratty: Is there a scenario where you would accelerate that.
Christopher Edward McGratty: Jamie.
Yes, I think.
It's just an economic exercise we.
We've got some great partnerships, we have some interesting agency eligible loans in our portfolio.
Depending on the interest rate environment, and what happens there is opportunity to do that without taking significant hits.
We're looking at everything and obviously, we want to make sure that our clients the ones, where we have full relationships know that their banking with us and we can continue to support them with respect to non strategic loans that may have good market value and easily scalable. We obviously have some levers to pull we could have.
This quarter done that we just didn't think the economics made sense because there wasn't.
Poor credit quality. It was just a question of kind of the.
Earnings and the yields on those loans so.
I think my short answer would be yes, as we execute that repositioning.
And we move forward and we don't want to jolt the income statement either from having lower earning assets you will see <unk>.
Proactive selective and opportunistic loan sales as we move forward, particularly if the interest rate environment moderates as we head into 2025.
Great. Thanks, Thanks, John.
Thank you.
Your next question comes from the line of Mark Fitzgibbon with Piper Sandler.
Please go ahead.
Hey, guys. Good morning, Glenn Let me Echo John's congratulations on your well deserved retirement.
Mark.
Christopher Edward McGratty: Glenn.
In your modeling I guess I am curious how different would your full year NII estimate be if we have no fed rate cuts. This year, it's not really so we have one cut in September and December right now and I think the difference Mark if I just kept it flat is it.
A total of $4 million, so it's not really relevant.
Okay, Great and then secondly on the office book It looks like you've got about $260 million of office loan maturities. This year I guess I'm curious did the borrowers have anywhere else to go or are you sort of forced to refinance for them.
Do you have I assume at this point pretty good line of sight into what's happening with those individual credits.
Do you see any problems on the horizon with that book.
Yes.
Yes, I mean, obviously, it's a book we're looking at significantly if the area, where <unk> had the biggest decline in in valuation. We give you the stats Mark lets say, we start out from a pretty good loan to value perspective pretty good debt service you've seen.
A small migration into classified for US we've done a really good job of taking the book down from $1 $7 billion to $1 billion over the last six or seven quarters.
Now what we're doing is focusing on kind of how we deal with we're dealing with maturities there. The way we are dealing with maturities across the entire Cree book and consistent with what you've heard from from others. During this reporting cycle, we've had opportunities we've been able to refi some.
There is I think you probably qualify it pretty well that there's not an immediate source of refinancing away from us quite frankly for most of these loans unless they have unique circumstances.
So we've had a couple of pay offs couple of sales in most cases, where we're doing on the maturities shorter term extensions, obviously you can't.
People will say is the industry kicking Mccann forward.
I guess at some level they are but we can't take the full can forward if an OCC regulated bank. So what we're doing is making sure that there is debt service in place.
Christopher Edward McGratty: At market or near market rates were making sure that we get kind of bootstrap collateral we get debt service coverage reserves, we get guarantees for periods of time so.
That's basically what we have I think we have 75% of our loans now have some sort of credit enhancement either through a guarantee or a debt service reserve and so we're just kind of.
Working our way through that portfolio and I think we're fortunate that our overall portfolio is relatively small more than half of it is class a it's geographically diverse it's not all metro and so so far and I'm knocking on wood here, we've been able to kind of work with borrowers through it.
And despite the.
Precipitous drop in valuation that Youre reading about and we see some of that.
The owners of these properties most of them feel like they still have equity in them.
In the building and so they are willing to work with us to make sure we have.
Our solid performing secured loan moving forward.
Thank you.
Thanks Mark.
The next question comes from the line of Steven Alexopoulos with Jpmorgan.
Please go ahead.
Hey, good morning, everyone.
Hey, Steve.
John I wanted to start on the loan outlook. So for the banks that reported this quarter. Most ceos are sounding a bit more optimistic.
Signing approved pipelines customer sentiment et cetera, and you guys are taking the range down to the lower end on a massive change, but youre pushing into lower end.
Really changed versus last quarter, you I know youre not also seeing an improvement in pipelines.
Good question. So I think if you look at the first quarter, we had one 2% loan growth, which is kind of in line with that 5% and you're right first quarter is usually a seasonally lower origination quarter, and obviously consistent with everyone else loan demand was sort of muted at the at the beginning.
Of the year.
And then we moved some some loans off which we can talk about later with respect to payroll finance and factoring into held for sale I think as we go forward, our sponsor and specialty book fee, which as you know it's been kind of a crown jewel of ours and we've seen the beginnings of green shoots and pipeline.
Build there, but it's been slower activity in that sponsor space.
So I think that was one reason, we talked just a second ago with Matt about commercial real estate and the fact that we're going to be a little bit more selective and careful as we move forward in that segment, both with respect to the kind of inherent risks and the optics of our concentration levels there.
And what I would say is definitely things getting better I think the second half could be good could we outperform on the 5%, yes, but as I mentioned earlier.
We don't like to over promise and under deliver we were disappointed this quarter by the NII and I think we look at the makeup of our portfolio went to our business line leaders and thought 5% whats the right guide I am hoping that we can outperform that we're seeing better pipelines.
Not seeing as robust pipeline, but I think theres reason to be optimistic for the second half.
Got it okay.
Thanks, and then for Mike.
Follow up so on the margin I know it came in a little bit weaker this quarter a lot of moving pieces at all wholesale funding et cetera.
For you Glenn do you think this is a bottom for the margin this quarter and how do you think about NIM trending before we get any rate cuts and then maybe if we do have rate cuts. Thanks, So I think so.
So Steve I think margin will be relatively flat quarter over quarter net interest income will improve quarter over quarter, but I think the margin.
Where we are right now 335 will probably be relatively flat I do in our on our forecast and the assumptions that I laid out before whether it's loan growth or the investment portfolio.
The repricing and stuff I do think that our margin will.
We will get to.
The $3 45 ish by the end of the year somewhere around there.
Potential upside depending on how quick we can reduce deposit costs.
Christopher Edward McGratty: That's how we're thinking of it right now so you can think of a four year average or a full year average margin somewhere around $3 41 to $3 42.
So that the full year.
Got it and I know you said in response to Mark's question, whether cuts happened or not very material.
And it cuts scenario given interlink some of the higher cost deposits you have.
Would that benefit the margin incrementally towards the end of the year. If we get rate cuts is that how we should think of it yet.
I mean, I think right now we see deposit costs like I said, peaking in the second quarter.
Between the second and third quarter, and then coming down a big driver of that I talked about this on the last call as of our $60 million in deposits about 20% or sort of it sort of had the same characteristic of interlinked. So they reprice pretty quickly. So those are the things like public funds those are things like like like Interlink.
And there are some other some other products. There. So you can think about 12 billion that I would consider sort of high beta products right now, but then they reprice down pretty quickly so.
That would be the first tranche to go when the fed cuts, we think that the deposit beta on the way down as you know 2000 say 2020 plus percent on the way down. So I think that's reflective of like a three month pipeline.
At the core deposits have to cycle through.
And so.
You will see that.
When the fed starts cutting you will see our deposit costs come down the other thing I would point out is.
We're starting to see the industry pulled back a little and we've reduced if I look at our CD rates. For example, we had $2 2 billion come due in the first quarter that repriced higher by 43 basis points.
As I look forward, there's another $2 billion in the second another $2 billion in the third quarter those are going to be neutral by the third quarter it might even be.
Accretive to us because one we've reduced our rate and we've also reduced the term.
Christopher Edward McGratty: So I think that the drag from the Cds repricing.
It will be behind us beginning the second quarter.
Okay got it thanks for taking my questions.
Thanks, Steve.
Your next question comes from the line of Casey Haire with Jefferies.
Casey Haire: Please go ahead.
Great. Thanks, good morning, everyone.
Casey Haire: Wanted to touch on expenses. So you guys kept the guide.
Which implies.
A decent decent ramp from the current run rate I know you guys still have to.
Totally run rate.
Just wondering if that is.
Conservative or just some color on what.
The expense pressure there.
Yes.
The midpoint of the guide.
Yeah. Thanks, Casey I think Youre right, we got a full year of the full quarter of our metros moving forward. So it just annualized I think we're keeping I guess to answer your question upfront. It's a conservative number but it is a conservative number based on the fact that we're building out our program and our work streams to make sure as we move.
Move towards a $100 billion that we continue to invest.
In areas, where we think it's important to make sure that we're beefing up our control functions.
And compliance and others. We're also continuing to invest in treasury payment capabilities digital channels to make sure that we're giving our clients.
All of the experiences experiences that they deserve we've talked often about the fact that we're starting from a mid forty's efficiency ratio, a full 10% lower than most of our peers and I think.
A lot of folks will need to continue to invest and particularly the ones in the $50 billion to $100 billion category, and we think that low starting point of efficiency gives us.
Some flexibility do.
Do we have opportunities to either switch.
Switch off timing of expenses.
Do do we have opportunities to continue to look at the makeup of our business we talked.
Incessantly over eight quarters about.
While we liked all of the various business lines. We had that there were some that had maybe were too small to really help us and we would reposition capital and you saw us do that with mortgage warehouse and you saw what Glenn talked about moving the payroll finance and factoring balances to held for sale.
Moving away from that business, we do have other opportunities to continue to refine our business and reallocate capital that would also give us.
Some relief on cost pressures. So I think it's a realistic number given our plan as we move forward I would say its conservative in that we do have levers to pull should the top line.
Not play out the way we.
Thank you will.
Got it thanks, and then just wanted to circle back on the on the loan growth.
So if.
Understanding you correctly CRE is kind of just kind of run in place.
The loan pipeline is.
Okay, but.
CRE drove a ton of the growth this.
This quarter, 42% of all alone.
Casey Haire: To hit 5% for the rest of the year.
<unk>.
The rest of the portfolio is going to have to average high single digit.
Pace of growth.
It doesn't seem like that the pipeline supports that and just some color there.
What buckets youre looking to grow to pick up the black our CRA.
Yes Fair question Casey. So obviously as you know in these businesses, it's an aircraft carrier rates, so youll probably see.
<unk>.
Healthy Cree originations in <unk> as well as we sort of work through the pipeline and we continue to kind of position ourselves and that's why we said kind of over the next six quarters you'd see that change in the balance sheet. So I don't think youll see.
A complete hole, if you will from the commercial real estate perspective, we.
We do have increasing activity.
In our sponsor and specialty business, which has been historically a high growth, 10% CAGR growth business over time, and Youre starting to read about more private equity activity and we're starting to see people gear up we have fund banking, which is a lever we can pull and we are really doing well there from a strategic.
Respective not only growing high quality, nice yielding assets, but getting deposits and other elements.
<unk> there we have a pipeline in the middle market, we've got our ABL and equipment finance businesses.
So we've got I think enough levers to pull that when we sit there and look at the profile, we think that to the extent Kris slows in the second half of the year.
That we have plenty of levers to pull and you've heard me say over and over again in a normalized environment.
We're at 10% commercial growth and we've done it over eight years consistently from a CAGR perspective. This is a unique environment we've seen.
Fits and starts and overall loan demand and now we are layering on top of that kind of a desire to.
Cree growth compared to the rest, but as you said that high single digit loan growth in the other categories doesn't doesn't scare us a ton.
As long as the market cooperates and by the way you know that we're risk managers first right we.
We really feel good about this bank, we're a bank that has even with the NIM compression a really healthy NIM at $3 35, we've got a 45% efficiency ratio.
102, five ROA and 18%.
<unk> ROE and so we're going to make sure that we're making the right short term moves.
Even if even if it means there is a quarter, where we fall short and I think our long term.
Growth targets and objectives are completely attainable. So our plan, we're not being blind KC going into saying, Hey, we're going to freeze Cree and we're going to still have 5% loan growth I think youre going to see creek kind of taper with respect to its growth trajectory and we feel pretty confident about the other asset classes and our ability to grow those loans.
Great. Thank you.
Thank you.
Your next question comes from the line of Jared Shaw with Barclays.
Please go ahead.
Hey, good morning.
Maybe just.
Switching over to deposits.
DDA balances declining this quarter.
Casey Haire: Do you think that we're near the bottom here or is there still some more diminishment you expect out of the basin.
And where do you think deposit growth comes from day to hit those targets going forward.
Yes, So let me so hi, Jared its Glenn.
So I think we did see an acceleration in the first quarter of customers sweeping excess cash into money market deposit accounts.
But we do if I look at my forecast my forecast is basically flattened that out so I think.
I would think of that.
The second quarter of $10 $5 $10 5 billion on DDA that it's basically flattened out for the year.
As far as growth.
The drivers.
And the guidance suggests $3 billion to $4 billion in deposit growth.
At the low and high range. So some of the key drivers are going to be a metro's, obviously, so say $100 million of low end 150 million in our high end <unk>.
Hey.
Between $200 million and $500 million.
On a course of the year interlink.
I'd, probably say about $1 billion for.
We will grow between now and the end of the year, we still continue to see CD growth, we saw a $300 million in the quarter I think for the full year, we're thinking it's probably about $500 million.
Then the rest of that would be probably in wholesale funding.
Sale of the wholesale channels.
Okay.
That's great color, Thanks, and then.
Can you just give a little more color on the credit valuation moves.
Casey Haire: We saw this quarter and what drove that and how we guess.
Could try to plan and that going forward.
Yes, so thats driven by primarily by rates of that.
You saw the reduction last quarter as rates from the third to the fourth quarter came down.
Casey Haire: And then you see it from the fourth quarter to first quarter sort of a snapback on that so.
It's pretty much it's pretty much driven by rates. These are this is the valuation. This is evaluation of our customer derivatives book.
Right and so.
There's been some some noise back and forth over the last couple of quarters.
Hard to forecast that you can tie it to rates and I would say if rates are stable right now you'd probably expect it to be relatively stable.
As rates go down it could it could we could have a little bit of a hit but not nothing like we saw from the third to the fourth quarter, where it was $4 3 million from memory.
Okay, great. Thanks for that and congratulations on the retirement and looking forward to talking to you over the next over the next quarter or so.
Thanks Sharon.
Your next question comes from the line of <unk> <unk> with Morgan Stanley.
Please go ahead.
Hey, good morning.
Okay.
Given the.
Given the comments.
On capital and eventually moving that CRE to tier one clusters, you have number lower than even 250%.
Does that mean that buybacks are off the table for the foreseeable future or do.
Do you think you can restart once you get to that 11% CET, one level and as we think about that 11% level as well.
Should we think about that as a more permanent I'll get now given that you want to eventually get to that 200% number or is it just a function of moving operator.
Slowing the CRE loan growth and then you can bring that CET, one number back down to 10 enough.
Yes, I think for the foreseeable future, 11% as the target just given the overall dynamics of us in the marketplace and some of the uncertainty from a credit perspective. So I think we are unlikely to buy back shares during 2024, unless there's some other.
Casey Haire: A specific change we generate a lot of capital every year, given our profitability metrics. So I do think as we did from the closing of the MLB two and a half years ago. We're just over two years ago for that 11% level and we're moving forward and we are generating capital and we don't have a good internal use.
<unk> of that capital, we will return it to shareholders in the form of dividends or more likely buyback given the fact that we feel comfortable with our dividend level. So.
I think you could see that restart as we get into 2025 and as our capital level gets to 11%. So that's kind of kind of our view right now obviously.
We've talked that from.
M&A perspective, we're not really focused at all on inorganic growth right now we would love to do more transactions like the in vitro transactions, which brings low cost deposits and fees, but right now our focus is on working.
Through our generating and delivering on our guidance taking care of our customers, making sure we work through credit Bill.
Building capital back up to 11% and then we'll be back to a normal kind of capital management plan in 2025.
Very helpful.
And then thanks for the detail on the rent regulated multifamily exposure.
You see the most balances were originated post 2019, but can you talk about your comfort level with the credit and the level of reserving for the 35% or so of that was originated pre 2019.
And are there any details you can share on that portfolio.
Yes, those are really small generally as we said granular small balance accounts averaged $3 $5 million in exposure.
Seeing kind of the metrics, we actually did a deep dive and try to look at the credit metrics of performance the debt service and the LTV comparatively between the ones that were underwritten before and after and we're not seeing any differentiation in performance. So the entirety of the book is performing.
Casey Haire: With very low levels of classified and criticized assets I think one of the key points to make not only on a rent regulated multifamily, but on our multifamily book in general is that we underwrite to in place market rents. So we're not counting on there being rent increases at the end of the day to ultimately service the debt and that is.
That has set us well.
It doesn't mean that higher NOI, I mean higher operating costs can't cash impact NOI, but we haven't seen any degradation in the portfolio. So we're looking right now at <unk>.
Similar portfolio construct in performance between the pre and post 2019 underwrites.
Got it.
Major degradation and Ltvs are either.
No we haven't seen it.
Great. Thank you.
Your next question comes from the line of.
Daniel Tamayo with Raymond James.
Please go ahead.
Thank you good morning, guys maybe.
Maybe first just changing gears here.
Looking at the fee income guide.
Just curious if there's something in the $97 5 million core number that you did in the first quarter that you expect to moderate or do you think that that's a decent number to grow off of in 2024.
Yes, so I think on that.
We were.
I think we still feel good like I said in our guidance at $3 $75 million to $400 million.
We did have a strong quarter I think the guidance implies a range of <unk> $92 million to $100 million.
And some of the the tailwind if I just sort of break it break it out we still will get the benefit full year benefit of our metros, which will add a 152 million beginning in the second quarter.
And then we will see increases in loan related fees deposit servicing fees and stuff like that throughout the year.
Some of the headwinds that we'll see.
Casey Haire: We will see probably lower HSA interchange, which sort of peaks in the first quarter.
But I think.
All in all we still feel good about the guide and I would expect that.
You would expect that it would be in that.
The 98% $99 million range.
Okay, great. Thanks Glen.
Understood.
Casey Haire: And then maybe just a follow up on the conversation on deposits.
You mentioned, you're budgeting for noninterest bearing to stay relatively flat for the rest of the year.
If that were not to be the case, if we did see some kind of.
Decline in those in those.
Balances as the year progressed, how would you expect to.
Go out and would you go out and fill the void with additional funding via wholesale channels or.
Would you.
Just curious how you would approach that scenario and there is no I think kind of thing kind of blend together.
Yes from a funding gap.
The answer is yes.
Depending on your loan growth.
Probably you get some additional mix than you would probably see it move as we've seen in the past like money market deposits. So.
It definitely increases your cost the other thing I'll point out John is that with a metros in HSA.
<unk> is at 7% or eight basis points and we.
We've come out of the box.
Casey Haire: Come out of the box pretty strong on that week, we closed at $800 million already at age 71.
And it's just.
Basically two months and so we expect we think thats going to grow pretty good as well and likewise with HSA.
So.
I think theres a lot of as John pointed out in the opening comments when you look at our diverse funding profile. There's a lot of levers. We can pull short answer is if we saw some more pressure on DDA.
Probably.
Casey Haire: We'd probably.
We probably use wholesale funding the last thing I'd point out on <unk> by the way and it is in this slide is that in that business. We have about $3 5 billion of committed funds in the future.
Casey Haire: So those are contractual settlements. So if you think of that business. There is $3 5 billion.
And our pipeline thats over years and years, but that's the committed funds to that business and I think that represents a pretty significant opportunity for us.
Yes, and I would just again I think I'm, probably saying the same thing Glenn said, but what we saw in the first quarter was less dda's out creating funding holds but DDA is to higher yielding accounts internally. So we didn't really it didnt create a funding hall it was shipped unfortunately higher cost deposits.
Okay, great. Thanks for all the color I appreciate it guys.
Your next question comes from the line of Bernie Yvonne.
With Deutsche Bank.
Please go ahead.
Hey, guys. Good morning, John and the beginning of the call. You noted you expect an ROA of one three and our ROTC of 18% in 2024 and beyond.
Similar to the just the results. This quarter is that how we should also think about this as a through the cycle return target and if you can elaborate on any underlying macro assumptions behind that.
Yes, I mean, I think if you just take kind of where our guidance is right now kind of thats the output right and the reason we talk about those return metrics is that when we announced the merger with Sterling three years ago, we thought that structurally. This is what this company can can generate.
With respect.
To returns and interestingly nothing.
Original assumptions about the macro environment. When we did the deal has come through we've seen.
Precipitous change in fed funds unprecedented we've seen banking crises, we've seen pressures on liquidity, we've seen outflows of deposits and through that all we've continued to post those kind of high teens Roe ATC.
And kind of a one two to one four ROA obviously this quarter it was down a little but if we look at our modeling and we sensitize to credit performance given our efficient operating model and our funding sources like those are our targets and we've been able to post those targets for the last nine quarters since the merger closed in.
Those remain our targets and what could hurt that would be things like.
More significant credit crisis.
Okay, great. Thank you for that and just separately.
Appreciate the additional CRE slides in the deck this quarter and your latest 10-Q, I believe you disclosed the CRE office reserves of nearly $36 million.
Just wondering how is that tracking as of 331.
Yes.
Yes, we disclosed it software those those reserves have moved up their 5% of the of the traditional office portfolio now.
I think last quarter they were.
Three 5%.
Anybody there.
Your next question comes from the line of Laurie Hunsicker with Seaport. Please go ahead.
Yeah, Hi, Thanks, Good morning, Glenn I just wanted Lori congrats.
Yes.
Could jump back to Tim.
C&I, that's where you had a big jump in non performers can you help us think about going from 135 million to $204 million in non performers in the quarter, where we are we're seeing that John <unk> and <unk>.
<unk> is the sponsor and specialty finance ABL, how much next any any color you can share with us there.
Thanks.
Yes, Laurie I will try at a company our size, we certainly don't talk about specific credits, but there were say four credits in the C&I.
We had a contractor healthcare services.
Food and restaurant company, one retail Cree that sort of the representation across it again, I think I try and look at the macro picture obviously, Jason is looking at the micro picture to see whether there's any correlated risk. So if I told you. They were five sponsor deals in a particular segment.
I would be transparent and tell you that and say we're concerned about it and give you more portfolio detail, but these were really idiosyncratic across.
Five different categories across our C&I and one Cree deal and again I think the critical element is that our non accrual loans. If you look at peers that have reported so far or you look at websters nonaccrual levels pre pandemic.
We still have an approach the benign credit environment level, there and I'm not I'm not pretending that we won't because I said, we will continue to have pressure, but nothing we've seen has suggested that there's a pocket of weakness poor underwriting asset class business line or geography that has us, particularly concerned we're really reviewing.
The whole portfolio. So I would say, it's idiosyncratic across industries across sectors and business lines in the quarter and a move back to a more normal level of non performers.
Got it and then just especially sponsor, especially about how much is that nonperforming.
Yeah.
Can you repeat the question.
Yeah. This is Don Charron specialty book, what what is the nonperforming right there a dollar amount there.
The $6 7 billion back.
About to about 2% about 2%.
Okay, Okay, Great and then just and just going back to margin here.
Do you have the spot margin and then can you just comment a little bit.
In terms of I think Toby borrowings I was thinking that the <unk> acquisition, you would probably be paying that down that's costing five 5% can you just share with that yes.
I guess, what youre thinking there.
So the spot the spot NIM at the end of the quarter was exactly where we were for the full quarter, So say $3 35.
Spot deposit cost.
I said on our call $2 24, so up one basis point from where we were for the quarter.
And loans down two basis points to $6 22.
And then with respect to <unk> I mean.
Part of the dynamic there Laurie is that we've paid down where we are.
Let expire brokered Cds.
And so the <unk> borrowings allow us to be a little more flexible than finding a broker Cds with terms and stuff like that.
And so we can we can tap that resource in order to fund.
Any shortfalls and things like that so I think.
That's the way I would think about it.
At this time there are no further questions.
I'd like to turn the call back over to Jon Wheeler for closing remarks. Please go ahead.
Thank you very much Eric I appreciate everyone. Joining us this morning have a great day.
Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect your lines.
Casey Haire: Yes.
Please wait the conference will begin shortly.
Yes.
Sure.
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