Webster Financial Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 10 speakers on the call.

Operator

Good morning. Welcome to Webster Financial Corporation's First Quarter 2023 Earnings Call. Please note this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlen Harmon, to introduce the call. Mr.

Operator

Harmon, please go ahead.

Speaker 1

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 1995 and are subject to the Safe Harbor rules. Please review the forward looking disclaimer and Safe Harbor language in today's press release and presentation For more information about risks and uncertainties which may affect us, the presentation accompanying management's remarks can be found on the company's Investor Relations site at investors. Websterbank.com. I'll now turn it over to Webster Financial's CEO, John Cielo.

Speaker 1

Thanks a lot, Edwin. Good morning, and welcome to Webster Financial Corporation's Q1 2023 earnings call. We appreciate you joining us today. I'll provide remarks on our high level results and strategic positioning before turning it over to Glenn to cover our financial results in greater detail. Q1 of 2023 was a memorable one for the banking industry, unfortunately highlighted by high profile bank failures that caused dislocation across the system.

Speaker 1

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 and a shifting environment for banking. We continue to deliver for our clients and in the quarter we prudently grew loans And core deposits. We generated solid returns and 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 abundance of caution, We took actions to augment our balance sheet liquidity, including increasing our cash position and utilizing higher cost funding sources.

Speaker 1

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 PPNR was down 6.6% from the prior quarter. Our adjusted ROA of 1.46 Percent was up from 1.37 percent 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 profiles. Our total deposits were up 2% also on a linked quarter basis with core deposits up 4%.

Speaker 1

While it seems like ages ago, many of you attended our Investor Day on March 2, 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 times of stress and uncertainty. While 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 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, 2 topics that I know are of significant interest. I'm on Page 3 of our presentation.

Speaker 1

The unique qualities of our deposit franchise remain a core strength of Webster. Our deposits consist of $24,000,000,000 of consumer deposits, largely originated in our retail footprint to long tenured clients, $8,000,000,000 of HSA Bank deposits, the entirety of these deposits are individual customer accounts and nearly all are within FDIC insurance coverage limits. And as you know, HSA deposits are long duration and low cost. Dollars 2,000,000,000 of business banking deposits within our commercial bank, Generally, these are smaller dollar and behave similarly to those in the consumer book. Dollars 5,000,000,000 of public fund deposits within the commercial bank, the majority of which are collateralized with highly predictable behavioral characteristics.

Speaker 1

Our remaining commercial deposits of 11,000,000,000 Our 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 $200,000 per account, I'll refer you again to Chris Modell's presentation at Investor Day, where we broke down the multiple deposit generating businesses in our commercial bank franchise. And finally, InterLink, the acquisition of which we completed in the Q1 has already proven to be highly valuable, 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 of deposit activity highlights the tremendous value of our deposit franchise. Customer activity within the consumer bank and HSA was business as usual throughout the entire quarter and both of these categories grew in Q1.

Speaker 1

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've 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 maintain significant cash balances and undrawn borrowing facilities. This represents 118% of our uninsured and uncollateralized deposits. We expect this ratio will continue to grow over the short term.

Speaker 1

As it relates to credit, at Investor Day, Jason So to, our 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 believe 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 And our loan portfolio has improved over the past year each quarter and is unchanged on a linked quarter basis. As you will see in our disclosures, the level of classified assets Our portfolio has remained stable as well.

Speaker 1

On Slide 5, we have refreshed and augmented our disclosures on our office portfolio. As you can see, our non medical office portfolio represents just 2.8% of total loans, had a low at origination LTV, A strong current and updated debt service coverage ratio profile has limited lease maturities in each of the next 2 years, It's diversified across geographies and thus far continues to perform well. In fact, criticized assets have fallen 4.7% of loans from 6.6% of loans in the Q4 of 'twenty two. I'll also remind you that the $1,400,000,000 in office exposure is down $260,000,000 or 15% from the close of our MOE as we were proactive in managing this portfolio during 2022, and we've originated only a nominal amount of office exposure since the two banks came together a year ago. With that, I'll

Speaker 2

turn it over to Glenn to review the financial statements in more detail. Thanks, John. Good morning, everyone. I'll start on Slide 6 with our GAAP and adjusted earnings. We reported GAAP net income to common shareholders of $217,000,000 with earnings per share of $1.24 On an adjusted basis, we reported net income to common shareholders of 259,000,000 And EPS of $1.49 after excluding one time after tax expenses of $42,000,000 Merger expenses were related Professional fees, severance and other compensation related charges and a provision adjustment for acquired unfunded lending commitments.

Speaker 2

The strategic initiative expense is related to repositioning of our securities portfolio. Next, I'll review balance sheet trends beginning on Slide 7. Total assets were $74,800,000,000 at period end, up $3,600,000,000 from the 4th quarter as we bolstered our balance sheet liquidity And at $1,200,000,000 in loan growth. Our securities balance increased modestly in the quarter. As discussed at our Investor Day, we sold 400,000,000 lower yield securities in January recording a loss on sale.

Speaker 2

The proceeds were used to purchase higher yielding securities resulting in an earn back of less than 1 year. AOCI attributed to unrealized losses against our AFS portfolio improved to $560,000,000 from $631,000,000 last quarter. In a steady interest rate environment, we anticipate roughly $85,000,000 of this will accrete back into capital annually. Loan growth was $1,200,000,000 driven primarily by commercial banking. Deposits were up $1,200,000,000 from quarter end reflective of growth in InterLink, HSA and our CD portfolio and match our quarterly loan growth.

Speaker 2

From quarter end through April 19, deposits have grown another 2,800,000,000 Borrowings increased by $2,300,000,000 as we enhanced our liquidity position in light of recent market events. Our borrowings included $8,600,000,000 of FHLB 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 remain strong as evidenced by our common equity Tier 1 ratio of 10.4% and a tangible common equity ratio of 7.15%. Lastly, we continue to grow tangible book value, which ended the quarter at $29.47 per share.

Speaker 2

Loan trends are highlighted on Slide 8. In total, we grew loans by $1,200,000,000 or 2.3 percent on a linked quarter basis. Loan growth was diverse by category. Commercial grew by $540,000,000 commercial real estate grew by 900,000,000 Residential mortgage balances were up modestly. The yield on the portfolio increased 55 basis points as loan yield outpaced increases Excluding accretion, loan yields increased by 56 basis points.

Speaker 2

Floating and periodic rate loans remained approximately 60% at quarter end. We provide additional detail on deposits on slide 9, with total deposits up 1,200,000,000 prior quarter or 2.3%. In addition to growth in InterLink and HSA, we added $370,000,000 in CDs. Our total deposit costs were up 51 basis points to 111 basis points for a cumulative cycle to date beta of 24%. It's worth repeating that between consumer, HSA and InterLink, 63% of our deposits are in consumer oriented, Long duration categories and to a large extent fully FDIC insured.

Speaker 2

In our HSA business, the average account balance is under 3,000. In Consumer Banking, our average account balance is under 25,000 and in Commercial Bank, our average account balance is under 200,000. 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 Q1 of 2024 with a more significant ramp in the 2nd 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 Q4 of 2022.

Speaker 2

Net interest income was down $7,100,000 or 1.2% linked quarter, Reflecting a shorter day count and a funding mix shift inclusive of the actions to augment our liquidity. Adjusted fees were down $19,000,000 while expenses remained I'll provide additional line item detail on subsequent slides. The net interest margin was 3.66%, down 8 basis points from the prior quarter and our efficiency ratio was 42%. On Slide 12, net interest income was down $7,100,000 linked quarter or 1.2 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 $4,400,000 or just 0.7%.

Speaker 2

Net interest margin excluding accretion decreased 6 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 Slide 13, we highlight our fee income for the quarter. On an adjusted basis, fees were down $19,000,000 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 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.

Speaker 2

Non interest expenses are highlighted on Slide 14. We reported an adjusted expense of $303,000,000 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, Including the Bend and InterLink acquisitions. Slide 15 details our components of our allowance for credit losses, which was up $19,000,000 over prior quarter. After recording $25,000,000 in net charge offs, we incurred $38,000,000 in provision expense with loan growth representing $12,000,000 The macro and credit factors $26,000,000 Additionally, we completed the adoption of the TDR accounting rules effective January 1 this year.

Speaker 2

This resulted in a $6,000,000 increase in reserve, which was recorded as a charge to retained earnings. As a result, you'll see our coverage ratio increased modestly to 1.21%. Slide 6 Slide 16 highlights our key asset quality metrics. On the upper left, Non performing assets declined $19,000,000 from prior quarter and represent 36 basis points of loans. Commercial classified loans as Percent of commercial loans declined to 1.47 percent from 1.5 percent despite a modest increase of $6,000,000 on an absolute basis.

Speaker 2

Net charge offs on the upper right totaled $25,000,000 or 20 basis points of average loans on an annualized basis. On Slide 17, we continue to exhibit strong capital levels. All capital levels remain in excess of regulatory and internal targets. Our common equity Tier 1 ratio was 10.4 percent and our tangible common equity ratio was 7.15%. Our tangible book value per share increased Surety's portfolio, our TCE ratio would be approximately 6.4% and our common equity Tier 1 ratio would be approximately 8.4% both as of March 31.

Speaker 2

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 $2,375,000,000 to $2,425,000,000 on a non FTE basis excluding accretion. We expect $25,000,000 in accretion would be added to that interest income outlook.

Speaker 2

For those modeling our net interest income on an FTE basis, I would add roughly $65,000,000 to the outlook. Our net interest income outlook includes the growth expectations above along with a 25 basis point rate hike In May, we assume the Fed fund rate remains flat for the remainder of 2023 at 5.25%. Fee income should be in the range of $375,000,000 to $400,000,000 Core expenses are expected to be $1,200,000,000 to 1,225,000,000 With an efficiency ratio of roughly 40%. We expect our effective tax rate of 20% to be in the range of 22% to 23%. We continue to be prudent managers of capital.

Speaker 2

Capital actions will be dependent on the market environment and we continue to target Common Equity Tier 1 ratio of 10.5 percent over time. With that, I'll turn it back over to John for closing remarks.

Speaker 1

Thanks, Glenn. On Page 19, I'll briefly hit on the next steps of our merger integration. As we have or 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 1st mock conversion last weekend and have several others planned through our go live date. The list of additional integration activities outstanding is 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.

Speaker 1

We're fortunate to operate from a position of strength. Our interest rate, risk management, 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 a stated and marked 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.

Speaker 1

And it's too early to anticipate all the effects We'll continue to position our bank to support our key clients and business segments through any operating environment. We'll 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. We'll continue to be good stewards of capital and manage our balance sheet in an efficient and prudent manner, depending on the environmental opportunities and or 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.

Speaker 1

I want to make this important point. We believe that based on our guidance we've provided, our year end performance metrics will continue to meet or the targets we set forth not only at merger announcement, but at Investor Day last month. That's an ROATC of approximately 20% And ROA in the 1.5% range and efficiency ratio around 40%. We believe those metrics We'll still be kind of best in class in our peer group. Thank you to our colleagues for their exceptional work in this quarter.

Speaker 1

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 of 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, Glenn and I will open it up to questions.

Operator

Thank you. Our first question comes from Chris McGratty from Keefe, Bruyette and Woods. Please go ahead. Your line is open.

Speaker 1

Hey, good morning. Good morning, Chris. Hey, John. Just want to

Speaker 3

make sure the 20 ROTCE, the 150 and the 40, what was The time period again, just want to make sure I got it.

Speaker 1

The 2 years merger, so think Q4 'twenty three. Okay. Great.

Speaker 3

In terms of the balance sheet, Could you help us with just your expectations for InterLink from here? How much you're going to continue to pull on that and then maybe The implications for borrowings and ultimately just where you wanted the loan to deposit to settle?

Speaker 2

Yes. Thanks. So Chris, let me take that. It's Glenn. Good morning.

Speaker 2

We think that the InterLink will probably close the year closer to $5,000,000,000 right now. And so November As of now, we're at $3,500,000,000 almost $3,500,000,000 as of yesterday. So we're well on the path there.

Speaker 1

Hey, Chris, we've talked about the beauty of that is it's a lever we can pull, adjust and down 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.

Speaker 4

And then just lastly on the buyback, obviously, not long year period is a

Speaker 3

quarter back because of the macro uncertainty. I guess, where do you shake out in terms of Thinking about this in terms of timing?

Speaker 1

Yes, I think that's great. Obviously, with the uncertainty in the market, we In the Q1, we weren't active and in the Q2, we likely won't be. But we do believe in our model now And our base case of what's going to happen in the macro environment as things settle that there'll be several $100,000,000 in buybacks in the 3rd Q4. But again, I always want to caveat that with the fact that we'll be prudent given the environment that we'll be in. But certainly at this valuation, It's an attractive investment for us to return capital that way.

Speaker 1

All right. Thanks a lot.

Operator

Our next question comes from Casey Haire from Jefferies. Please go ahead. Your line is open.

Speaker 5

Yes, thanks. Good morning, guys.

Speaker 1

Hey, Jason.

Speaker 5

Couple of questions on the expense front. So the strategic expenses Up on the quarter, was any of that relating to the control issues around that caused the 10 ks delay?

Speaker 1

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 the path of remediation of OLED too.

Speaker 1

So It's not going to pop anywhere.

Speaker 5

So consistent with what you guys talked about at Investor Day, this is not going to have a it's not going to lead to a meaningful impact on expenses? No. Okay. And just following up, so the efficiency ratio 42% in the Q1, you guys are still shooting for that 40% level, Which implies a sub 40% efficiency ratio in the remaining quarters despite You're keeping your expense guide the same, but you've taken down your revenues. So I'm just trying to square what appears to be A tougher outlook and still holding that efficiency ratio?

Speaker 2

Yes. So you saw our expenses for the Q1 at $303,000,000 basically flat Quarter over quarter. So we think we have some opportunity there, but I think as you push it forward, We still feel good about operating in the 40% range. So we were a little elevated this quarter And I think it will play out fine.

Speaker 1

Yes, Casey, if you again look at the middle ranges of our guidance, I think that comes out to about a 41%, so kind of Flat and I said around 40% with our targets. I think we do have opportunities and levers to pull once we get through conversion On expenses, and so I think that's where we'll be right in that 40% low 40s 40% range.

Speaker 5

Very good. Thank you. And just last one, any commentary on HSA, Up 6% year over year. I think that's a little bit lighter than what you guys talked about And Investor Day, though John, I agree with you that seems like a long time ago now. But just color on a mid single digit growth rate in HSA year over year.

Speaker 5

So I

Speaker 1

think where we are is kind of the industry growth slowed a little bit. We're pretty happy with where we are with Year over year in the Q1 growth. So I would say, I don't think it's anything unusual. KC, we're still bullish. It's very difficult to find Deposit growth in the high single digits on low cost deposits.

Speaker 1

So nothing unusual and actually I think we had a pretty good quarter relative to what Debonair And year over year relative to what Debonair showed in terms of industry growth.

Speaker 5

Great. Thanks guys.

Speaker 2

Thank you.

Operator

Our next question comes from Matthew Breese from Stephens. Please go ahead. Your line is open.

Speaker 6

Good morning. I wanted to touch on credit. First, could you just give us some sense on loan resets for commercial real estate? What is the average kind of change in loan yield for loans Coming out of, I'd assume 2018, 2019 vintages to today. And what kind of impact does that have on debt service coverage ratios?

Speaker 6

And then the second question I have is, just same type of profile, right, 2018 or 2019 vintages to today. What's kind of the average change in cap rates that you're using when you underwrite those properties and how are borrowers behaving and reacting to these changes?

Speaker 1

Yes, it's interesting. It's hard to give sort of a blanket response to that because what we're seeing is in maturities, Obviously, what we're doing is we're renegotiating with borrowers. They're 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 100 basis points up from a cap rate perspective. 6.2% was our kind of all in yield.

Speaker 1

That's probably up in March in commercial real estate. That's probably up 250 basis points since the 2018 2019 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 A 10% decline in NOI increases I'm sorry, impacts DCR about 17 basis points. I think of my LTV number that I had here. Give me one second.

Speaker 1

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 as it's 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 higher LTV. So, so far if you look at all of our asset classes, we gave you a lot In office, we're in pretty good shape there. And I think on one of the slides in office, we show the maturities left this year. We've already kind of Resolved about $200,000,000 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.

Speaker 1

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 LTVs.

Speaker 6

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 market being dislocated, does it change your view of how you attack Or kind of man the field in regards to New York City. What kind of opportunity is there to take market share in the wake of this disruption?

Speaker 1

Yes. I guess we look at it 2 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 loans. And so while obviously we believe that there will be stress particularly with the loans that Signature Bank We'll be selling in that New York Community Bank didn't buy.

Speaker 1

We're not too worried about the impact on the overall market as long as we've got really good Sponsors standing behind their properties and we're able to work through borrowers. And as we said in our commercial real estate portfolio in New York, There's 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 will be potentially teams available.

Speaker 1

We do believe that there will 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, it's 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 and 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 relationships 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 So what I'd say is, yes, opportunity in the future, but really prudent about how we go about Deciding where and when to take that share.

Speaker 6

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 2.8%. This is off from I think 3% at year end.

Speaker 6

As you continue to move the ball forward on this front, by the time we do get to 2024 and potentially close to rate cuts, Where do you expect the balance sheet sensitivity on this metric to be?

Speaker 2

Yes. So let me take that, Matt. So you probably see on the same chart, I think you're back on Page 20 or so that we've continued for 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.

Speaker 2

I don't think we'll be at a neutral point, but I think we continue just to work that down.

Speaker 6

Okay, understood. That's all I had. Thanks for taking my questions.

Speaker 1

Thanks, Matt.

Operator

Our next question comes from Daniel Tamayo from Raymond James. Please go ahead. Your line is open.

Speaker 7

Thanks. Good morning, everyone. Hi, Damian. Just one question for me. I think, Glenn, you'd mentioned that You expect to hold a higher percentage of normalized excess cash kind of going forward.

Speaker 7

Curious if that's Similar to the amount that you're holding now or if that if you expect that to grow and kind of the timeframe where you think that might have to stay on the balance sheet? Thanks.

Speaker 2

Yes. So thanks and good morning. So 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 that level is about $1,000,000,000 as opposed to I think in the quarter we were $2,200,000,000 I think you'll see that elevated in the Q2 a little bit because that's we've only closed out the quarter, so we continue to build some cash balances, We'll continue to manage that down for the remainder of the year. And obviously that has implications from a NIM standpoint, right?

Speaker 2

And so Because it's basically it's not it doesn't it drags it deters from NIM. So you'll see probably a little bit more NIM compression in the Q3, but then as we deploy that cash and draw it down, It should NIM should come back up.

Speaker 7

Okay. And this is all contemplated In your guidance the way you just laid it out? Yes.

Speaker 1

Yes. It is. Okay.

Speaker 7

Thanks. That's all I had. I appreciate

Speaker 1

it. Thanks.

Operator

Our next question comes from Mark Fitzgibbon from Piper Sandler. Please go ahead. Your line is open.

Speaker 1

Hey guys, good morning. Hey Mark.

Speaker 4

First question I had, you had about $900,000,000 of commercial real estate growth in the Q1. Was any particular concentrations that came in?

Speaker 1

It wasn't. I can tell you again office is obviously disfavored. 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 is 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 In the regular C and I and in the sponsor book, the transaction volume is not as high.

Speaker 1

So, I just throw that in there for context that To get $900,000,000 of growth in CRE in the quarter, the level of originations did not have to be nearly as high as it was a year ago where there was a lot more prepayments Okay.

Speaker 4

And then secondly, I'm curious if you're seeing any pressure to boost HSA deposit rates? And Is your modeling assuming that deposit costs there stay at around 15 basis points going forward?

Speaker 2

Yes. So we are modeling at 15 basis points, you probably saw 2 quarters ago, we did increase the rate. So it went from like a 9 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 like that.

Speaker 4

Okay. And then lastly, I saw in some of the local papers here in Connecticut that 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?

Speaker 1

Yes. We actually, Mark, don't think there'll be any financial impact to us. As we said, it's a 3rd 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 Regulators and clients, none of our systems were impacted, and we believe that there'll be no material financial impact To Webster with respect to all aspects of putting that behind us.

Speaker 4

Thank you.

Speaker 1

Thank you, Mark.

Operator

Our next question comes from Steve Alexopoulos from JPMorgan. Please go ahead. Your line is open.

Speaker 8

Hey, good morning, John. Good morning, Glenn.

Speaker 2

Hey, Steve. Hey, Steve.

Speaker 8

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.

Speaker 1

Yes. Interestingly, there was no differentiation really between the 2 legacy banks, Which I hate to say at this juncture into our deal. And so behaviorally, Steve, what we saw at across The new Webster was the same across our footprint, which was, as I mentioned, business as usual In consumer and 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 commercial customers, think $200,000,000 $100,000,000 Who either from a pressure from their Board or not for profit that had a Board that pushed on fiduciary duty and obviously I'm sure you're hearing this from everyone else. In those 2 or 3 days that moved a portion of those deposits likely to where you work, Steve, To JPM or the like.

Speaker 1

And the interesting points there, Steve, were no one closed accounts, No one drove their balances down to the FDIC insurance limits. They took $100,000,000 deposit to $50,000,000 or $200,000,000 deposit to $100,000,000 deposit. And the more sophisticated borrowers and the larger corporate borrowers We're 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.

Speaker 1

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 2 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 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'll continue to grow core commercial deposits and no difference across geography or legacy bank.

Speaker 8

Okay. That's helpful. Very helpful actually. If I can shift to the loan side, so the downshift And loan growth, which is modest, right? You took the ranges down by 2% each.

Speaker 8

But how much of that is tied to you guys tightening the credit box versus assuming there'll be less Demand in the market, just given the economic outlook?

Speaker 1

It's a great question. I talked about this yesterday, Steve. I think There are 3 implications. Number 1, and probably most importantly to put a fine point on your question, We probably lowered the guidance because of organic lower Fed H8 loan demand. So the market there is less loan demand and that's going to be a driver.

Speaker 1

2, I don't know whether it's 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 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, the three things that will have us going from a high single digits to mid single digits.

Speaker 8

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 assume cut start cutting either second half of this year or early next year.

Speaker 8

How do you think about the delay, the lag in terms of either months or percentage of rate change we need before you could start reducing The cost of interest bearing deposits.

Speaker 2

On the deposit side, so I think look, I think if you look at our deposit data, we've lagged Like 2 quarters or so in rate increases. But I think on the way down as the Fed begins to cut, it's probably within 3 months you'd begin to see it Pretty quickly. So I think the reaction on the way down would be more significant than the lag on the way up.

Speaker 8

Okay. Perfect. So that, Glenn, if we did see that play out for the second half, we saw 2 rate cuts. Would that materially impact this 38% Permittal beta you're calling out or would it not be material?

Speaker 2

No. If when well, it depends on where you see it in the second half. I mean, we're thinking in the Q1, we'd see a rate reduction. But so it probably if it's in the Q4, you probably won't see as much, Right. Could it be like 30 days or something like that, 60 days before you saw anything?

Speaker 2

I think what you're seeing here, Steve, is That this is the deposit base catching up along with growth in our deposit base in part because of shoring up the balance sheet from a liquidity standpoint with things like Intralink, broken 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 holding all this excess cash, which is the prudent thing to do. Then as we get more clarity on the future and the next couple of quarters, we'll manage that down. And so you'll see the margin come back up.

Speaker 8

Got it. Perfect. Thanks for taking my questions.

Speaker 1

Thanks,

Operator

Our next question comes from Zach Westerlund from UBS, please go ahead. Your line is open.

Speaker 1

Hi, it's Jack on for Brody. My 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.

Speaker 1

So if you think about our 20 For $25,000,000 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 $7,000,000 of that were related to strategic loan sales about $350,000,000 in the quarter. So obviously very, very $1,000,000 or so were all in about 4 commercial credits with actually I think 4 different business lines with no kind of Correlated risk in terms of or anything that we're seeing with respect to 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 $7,000,000 of those charge offs that were Done through proactive loan sales by us. Understood.

Speaker 1

Thank you. And then just One other quick one for me. On the securities growth, could you just provide, if you're able to, the new purchase yields versus what's rolling off the book?

Speaker 2

So I think what we purchased at was a little over 6, say 613, somewhere around there. What came off was at about 3.11. So there's about $200,000,000 that came off and about $900,000,000 that went on. And in addition to that, we had, as I said in my prepared remarks, about $400,000,000 in restructuring that we did, so security sales effectively. And those were at about 60 basis points, 70 basis points.

Speaker 1

Awesome. That's it for me. Thank you. Thank

Speaker 2

you. Thank you.

Operator

Our next question comes from Jared Shaw from Wells Fargo. Please go ahead. Your line is open.

Speaker 9

Hey, guys. Good morning.

Speaker 1

Hey, Jared.

Speaker 9

Hey, just looking at the quarter to date deposit growth, Can you give the composition of where you're seeing that, I guess, especially the contributions from Brio and InterLink? And then to get to that higher 38% terminal beta, are you expecting higher contributions from Prio and InterLink than I guess you were assuming before?

Speaker 2

Yes. So for the is your question about from the Q4 to the Q1, Jared?

Speaker 3

Well, I

Speaker 9

guess both, yes. And then what you've seen what you called out is seeing so far in April.

Speaker 2

Yes. So InterLink itself was for the Q1 was $2,800,000,000 of the growth. So we basically that's From $0,000,000,000 to $2,800,000,000 So that was a big driver. The offset to that was we let some of the broker deposits run off. They went from like $1,400,000,000 to $672,000,000 right?

Speaker 2

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 $1,000,000,000 and those were long dated, little over 4% retail type of CDs. That's how we ended the Q1. As I said in the prepared remarks, we're actually up in the Q2 by another 2,800,000,000 And a big piece of that and I'd say about $500,000,000 to $600,000,000 of that is interlinked again And then the remainder is primarily brokered CDs. And our idea with that and there's some commercial growth as John indicated, there's continued retail growth, In big chunks, that's what it is. And so that we're using to pay down basically some FHLB borrowings and things like that.

Speaker 2

So it's Sort of cost neutral from a NIM standpoint and things like that, but it also provides us more off balance sheet liquidity, if So we wanted to make sure we preserve the optionality of that. And then the other dynamic as I said a few times is that we're managing down cash. So you would expect to see our FHLB borrowings to 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 we'll get, whether it's Brio or things like that. So I think that's kind of how we're thinking about

Speaker 9

it. Okay. Thanks. And then when we just look at where these are on the balance sheet, is InterLink Money market or I guess where Brio and InterLink in terms of both the CDs and money market?

Speaker 2

So InterLink is in money market, but I would point you to our slide presentation because we broke it out there. So if you look on Page 9 of our presentation, you can see the InterLink piece. So we sort of broke it out by product type and then by line of business. And so you see in the corporate piece, which is the treasury piece, And John actually had it in his slide as well, the net difference between Intralink and whatever else is basically Wholesale funding.

Speaker 1

Okay. And then just

Speaker 9

finally on InterLink, the cost of that for the quarter, is that Similar to FHLB, I guess, where are we where is the cost on that?

Speaker 2

Yes. It's like Fed Funds it's like 5% Fed Funds plus 15

Speaker 9

Okay, great. Thank you very much.

Speaker 1

Sure. Thank you, Jared.

Operator

Our next question comes from Chris McGratty from Keefe, Bruyette And Woods, please go ahead. Your line is open.

Speaker 1

Thanks for the follow-up.

Speaker 3

Glenn, just on the guidance, the expenses and the fees, I mean, are you Anything in those about the charges? Just to make sure I got the right third point.

Speaker 2

Am I excluding I'm sorry.

Speaker 3

In the expense In the expenses, the 1.2% to 0.22%

Speaker 2

Yes, those are our core operating expenses. So it doesn't include merger related expense. To the extent we have 1, which we shouldn't have much, any other strategic initiative type expense.

Speaker 3

And same with the fees that excludes the bond loss?

Speaker 2

Yes, same thing. Same thing.

Speaker 1

Got it. All right. Thank you. Sure. Thanks, Chris.

Operator

We have no further questions in queue. I'd like to turn the call back over to John Ciulaf for closing remarks.

Speaker 1

Thank you very much. I appreciate everyone joining this morning. Have a great day.

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Earnings Conference Call
Webster Financial Q1 2023
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