Etsy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2024

There are 14 speakers on the call.

Operator

Good morning. Welcome to the Webster Financial Corporation 2Q 2024 Earnings. 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.

Speaker 1

For the Q and A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue. I will now turn the call over to Webster Financial's CEO, John Ciulla. Thanks a lot, Emlyn.

Speaker 2

Good morning, and welcome to Webster Financial Corporation's Q2 2024 Earnings Call. We appreciate you joining us this morning. I'll provide remarks on our high level results and operations before turning it over to Glenn to cover our financial results in greater detail. There've been a number of important accomplishments since our last earnings call, including the announcement of our private credit joint venture with Marathon Asset Management, the hiring of Neil Holland as our next Chief Financial Officer and the addition of Bill Haas to our Board of Directors. The Marathon joint venture is a great opportunity for Webster as it will allow the sponsor team to better serve and meet the growing needs of our client base, while at the same time enhancing Webster's balance sheet flexibility and adding a new source of fee income and deposit opportunities.

Speaker 2

Our sponsor team will continue to operate in its existing form And by partnering with Marathon to fund a portion of our loan originations, we'll gain the ability to offer larger facilities and additional financing solutions to our existing clients that we would not traditionally hold on our balance sheet. We're also very excited about the new leaders we have brought into the company. Neil is a great addition to our executive management team. In addition to his many talents, Neil brings years of experience leading finance organizations at large banking institutions. He was CFO of First Republic prior to Webster having joined their team in November of 2022.

Speaker 2

The 14 years prior to that, Neil was with MUFG and their Union Bank subsidiary, where at different times he served as CFO, Chief Accounting Officer and Head of FP and A of their Americas organization, whose balance sheet was over $300,000,000,000 in assets. He also served as CFO of their regional bank. I think you'll share my enthusiasm as each of you have opportunities to engage with him following Glenn's transition in early August. Phil Haas, who joined Webster's Board of Directors last week is also a great addition to the company. Bill is coming off a 38 year career at the OCC where he was Deputy Controller for midsized bank supervision.

Speaker 2

His extensive regulatory and risk management background will be tremendous asset to our Board of Directors. In combination, these additions illustrate our commitment to investing in the people and processes that will advance the capabilities of our company as we grow and create long term franchise value for stakeholders. I'll now turn to our financial performance for the quarter beginning on Slide 2. On an adjusted basis for the quarter, we generated a return on average assets of 1.16 percent and a return on tangible common equity of 17.1%. Our adjusted EPS was 1 point 26 dollars Our efficiency ratio was 46%.

Speaker 2

We were pleased to grow core deposits by $700,000,000 and used a significant portion of the funds to redeem wholesale funding. Loans grew by $500,000,000 or just under 1% with growth anticipated to continue in the back half of the year. On Slide 3, we recap our unique deposit funding profile where I specifically want to highlight encouraging developments at HSA Bank and Amitros. At HSA Bank, investments we've made to enhance

Speaker 3

our technology via the Bend acquisition 2 years

Speaker 2

ago are bearing and bodes well for our deposit balances next year. These and bodes well for our deposit balances next year. These investments in technology also provide flexibility to improve our solutions. In the Q3, we will launch a new investment offering, which provides a discrete opportunity to add roughly $400,000,000 in deposits. In the quarter, we also extended our long term relationship with Cigna, our largest HSA partner relationship.

Speaker 2

Amitros continues to produce the robust deposit growth we anticipated when we announced the acquisition at the end of last year. Additionally, we will begin offering Webster Banking products to anticipated in our original projections for our metros and strengthens the strategic rationale for the acquisition in addition to the value proposition for our Mitros' member base. On Slide 4, we provide an updated overview of our commercial real estate portfolio, focusing on the 2 portfolios that are capturing most of the headlines. There were no significant changes to the performance characteristics of our rent regulated multifamily portfolio, where our conservatively underwritten portfolio's performance has held up really well, as you can see by consistently low levels of classified and non accrual loans. The portfolio is granular, has conservative LTVs and debt service coverage ratios, was underwritten to property cash flows at the time of origination and has limited maturities in the next 2 years.

Speaker 2

For office, we also have a portfolio that is granular with conservative underwriting characteristics. As the sector continues to be challenged, we did have several loans moved to non accrual, which was the primary driver of the increase in our overall NPLs this quarter. Office balances were $950,000,000 at the end of the second quarter, down from just over $1,000,000,000 last quarter. In our office portfolio, approximately 75% of the remaining loan balances have some form of credit enhancement, which adds significant value in mitigating potential losses. A few important comments to make as it relates to overall credit.

Speaker 2

Even with the negative risk rating migration, our NPL ratio, classified loan ratio and annualized charge off rate in the quarter all remain proximate to or better than pre pandemic Webster levels, meaning these metrics remain consistent with a more normalized credit environment. As we continue to aggressively and proactively manage and review the portfolio, absent a material change in the environment or unforeseen surprises, we don't see this rate of grain migration continuing in Q3. Finally, with a 1.3% reserve coverage, our CET capital accreting back to 11% by year end and our strong operating and capital generation capabilities, we remain confident in our ability to navigate through whatever this credit cycle throws at us. With that, I'll turn it over to Glenn to cover our financials in more detail.

Speaker 1

Thanks, John, and good morning, everyone. I'll start on Slide 5 with our GAAP and adjusted earnings for the Q2. We reported GAAP net income to common shareholders of $177,000,000 with diluted earnings per share of 1.03 dollars On an adjusted basis, we reported net income to common shareholders of $216,000,000 and diluted EPS of 1.26 dollars The adjustment was a pretax $49,000,000 charge as a result of repositioning of our securities portfolio. Next, I'll review balance sheet trends beginning on Slide 6. Total assets were $77,000,000,000 at period end, up nearly $700,000,000 from the Q1.

Speaker 1

Our security balances were up $165,000,000 relative to the Q1. The yield on the portfolio increased 22 basis points linked quarter to 3.86 percent. In the quarter, we sold securities with a book value of 962,000,000 and reinvested with a nearly 400 basis point improvement in yield. The new securities had a duration of 3.7 years. We anticipate an earn back of less than 1.5 years.

Speaker 1

The restructuring contributed 11 basis points of the portfolio improvement. We expect that we'll add another 13 basis points in the 3rd quarter as yields will fully reflect the restructuring that occurred midway through the Q2. Reinvestment of cash flows and portfolio growth made up the balance of the improvement in yields for the quarter. It's notable that we manage our securities restructuring such that did not meaningfully impact our capital ratios. Loans increased $475,000,000 or 0.9 percent over the linked quarter with the majority of the growth driven by commercial categories.

Speaker 1

Total deposits were up $1,500,000,000 with growth driven by InterLink, Amitros and Consumer Banking, offset by a seasonal decline in public funds. Loan to deposit ratio was 83% in the range of where we expect to operate over the next few quarters. Borrowings decreased $1,000,000,000 as we replaced borrowings with core deposits from InterLink. Capital levels improved modestly. The common equity Tier 1 ratio was 10.6% and our tangible common equity ratio was 7.18%.

Speaker 1

Tangible book value increased to $30.82 per common share with the increase from the prior quarter driven by retained earnings offset by a small increase in AOCI. In a steady interest rate environment, we anticipate $100,000,000 of unrealized security losses would accrete back into capital annually. Loan trends are highlighted on Slide 7. In total, loans were up 475,000,000 dollars or 0.9 percent linked quarter. Growth was driven by commercial real estate and C and I.

Speaker 1

As we said on our last earnings call, we would not expect significant growth in the CRE portfolio beyond this quarter. The yield on the loan portfolio was flat as we continue to see mix shift toward categories with lower credit spreads. Floating and periodic loans were 58% of total loans at quarter end. We provide additional detail on deposits on Slide 8. We grew total deposits $1,500,000,000 with growth driven by InterLink, Consumer Banking and Amitros.

Speaker 1

When combined, transactional and low cost long duration healthcare financial services deposits comprised 45 percent of our deposit base. Our DDA balances were down 220,000,000 dollars relative to the prior quarter as migration to higher cost deposit categories is slowing. Our total deposit cost was up 12 basis points over the prior quarter to 2 35 basis points. For the month of June, the deposit cost was 2 37 basis points. Increases were the result of clients opting for higher yielding products, renewals in our CD portfolio and the utilization of InterLink to replace wholesale borrowings.

Speaker 1

Our total cost of funds was up a less significant 10 basis points and our cumulative cycle to date total deposit beta is now 44%. On Slide 9, we illustrate our funding beta assumptions. On the left hand side, we've updated our deposit beta assumption to incorporate the 3rd quarter, during which we expect our cycle to date beta to hold steady at 45%. Price competition for deposit has slowed And over the course of the Q2, we successfully piloted small decreases in pricing of certain products. Additionally, we have repriced substantially all our CD portfolio in the past year and renewals are now pricing below legacy rates.

Speaker 1

These factors plus the HSA deposit opportunity John mentioned in his remarks will contribute to a slower pace of deposit rate increases. We've also show our funding data on the right hand side, which is a better illustration of the power of our unique deposit profile. While our utilization of InterLink as a source of liquidity results in a higher deposit beta, in conjunction with our other deposit products, it lowers total funding costs and enhances off the balance sheet liquidity. As you can see, this advantage by looking at our all in funding costs over the last 12 months compared to peer and industry trends. Moving to Slide 10, we highlight our reported to adjusted income statement compared to our adjusted earnings for the prior period.

Speaker 1

Net interest income was up $5,000,000 from prior quarter, driven by balance sheet growth and higher earning asset yields, partially offset by higher funding costs. Adjusted non interest income was down $5,000,000 driven by lower BOLI income and lower deposit and customer hedging activity. Adjusted expenses were up $5,000,000 and the provision increased $13,500,000 Excluding adjustments, our tax rate was 21.2% this quarter, up from 20.7% in the Q1. Overall, adjusted net income was down $17,000,000 relative to the prior quarter and our efficiency ratio was 46%. On Slide 11, we highlight net interest income, which increased $5,000,000 or 0.8 percent linked quarter, driven by balance sheet growth and the repositioning of our securities portfolio.

Speaker 1

The net interest margin was down 3 basis points to 3 32 basis points as a result of increased funding costs, which were partially offset by higher asset yields. Our yield on earning assets increased 6 basis points over prior quarter with loan yields flat and the securities portfolio up 22 basis points. Deposit costs were up 12 basis points as we utilized InterLink to reduce our wholesale borrowings. As I previously mentioned, we expect the underlying pace of deposit repricing to continue to moderate. Total liability costs were up 10 basis points relative to a 12 basis point increase in the last quarter.

Speaker 1

On Slide 12 is non interest income, which was down $5,000,000 versus prior quarter on an adjusted basis. There were a number of components driving the decline, including $4,000,000 in lower HSA fees, driven by seasonal trends and account fees and a $1,000,000 lower benefit from CBA adjustment, whose valuation was unchanged this quarter. Non interest expenses on Slide 13. We reported adjusted expenses of $326,000,000 up $5,000,000 from the prior quarter. Dollars 3,000,000 of the increase came from a full quarter of Amitro's operating expense and intangibles and the remaining increase related to investments in technology and increased deposit insurance costs.

Speaker 1

Slide 14 detailed components of our allowance for credit losses, which was up relative to prior quarter. After recording $33,000,000 in net charge offs, we recorded a $61,000,000 provision. Of which $55,000,000 was primarily due to credit factors and $6,000,000 due to loan growth. As a result, our allowance coverage to loans increased to 130 basis points from 126 basis points last quarter. Would also note we increased reserves in the traditional office portfolio by $10,000,000 in the quarter.

Speaker 1

Slide 15 highlights our key asset quality metrics. On the upper left, non performing assets increased $85,000,000 relative to the prior quarter with non performing loans now representing 72 basis points of total loans. As John indicated earlier, the increase in NPLs was related to 4 office credits. Commercial classified loans as percent of commercial loans increased to 291 basis points from 224 basis points as classified loans increased by $286,000,000 on an absolute basis. Classified loan increase was concentrated in healthcare and office.

Speaker 1

Net charge offs on the upper right totaled $33,000,000 or 26 basis points of average loans on an annualized basis, down modestly from last quarter's level. On Slide 16, we maintained strong capital levels. Our common equity Tier 1 ratio was 10.6% and our tangible common equity ratio was 7.2%. Our tangible book value was $30.82 a share. I'll wrap up my comments on Slide 17 with our outlook for 2024.

Speaker 1

We expect loans to grow by 4% to 5% for the full year with growth for the remainder of the year driven by C and I categories. We're anticipating deposit growth in the 5% range with growth in diverse products. We now expect net interest income in the range of $2,320,000,000 $2,340,000,000 on a non FTE basis, which will effectively leave us flat on a year over year basis. For those modeling net interest income on an FTE basis, the FTE adjustment is now expected to be roughly $55,000,000 from $65,000,000 previously. Our net interest income outlook assumes one cut Fed funds rate in December.

Speaker 1

Adjusted non interest income will be roughly $375,000,000 at the lower end of our prior range. Adjusted expenses continue to be in the range of $1,300,000,000 to $1,325,000,000 Our efficiency ratio is expected to be in the mid-forty percent range. We expect an effective tax rate of 21% and we remain prudent managers to capital. Our near term common equity Tier 1 ratio target is 11%, which we anticipate will achieve by year end 2024. And as you can see, our long term target continues to be 10.5 percent.

Speaker 1

With that, I'll turn it back to John for closing remarks.

Speaker 2

Thanks, Glenn. I want to make one final point on outlook. While on absolute basis, our net interest income performance has been relatively solid with respect to industry trends with NII increasing over last quarter. It obviously has not been as robust as we anticipated earlier in the year. Our sponsor business has not grown as anticipated due to slower private equity activity and competition from the private credit markets and the absolute level of loan repricings and refinancings in a higher for longer environment has been lower than anticipated, which has had the collective impact of muting loan yields.

Speaker 2

I want to stress that we've taken steps to stress the downside risks in our revised outlook to position us well to deliver results within the new range by the end of 2024. I want to take a moment to recognize Glenn's outstanding 13 years at Webster. He's been my partner and provided steadfast execution and a ton of value as we have grown the bank and navigated through some unique operating environments and a transformational MOE. Consistent with a strong commitment to Webster, Glenn has agreed to remain an advisor to the company for a period of time. On behalf of our Board and our leadership team, I want to wish Glenn all the best in his next chapter.

Speaker 2

We remain confident about Webster's prospects and long term franchise opportunities as we continue to build and invest in our organization's capabilities and people. Our return profile and balance sheet strength provide us with great opportunities to invest in our company and better serve our clients, helping to ensure we remain in a position of strength with returns at the top of our peer group, a better than peer efficiency ratio, a strong level of absolute net interest margin and a relatively favorable deposit and funding cost profile. Thank you to all of you for joining us today. Operator, Glenn and I will open the line for questions.

Speaker 4

Thank you.

Operator

We will now begin the question and answer session. We'll take our first question from Matthew Breese at Stephens Inc.

Speaker 5

Hey, good morning. Good morning. I was hoping you could give us some idea for the margin as we head into year end with some rate cuts and into 2025? Obviously, the balance sheet is a bit more interest rate neutral. There was a securities restructuring and then there's still fixed asset repricing.

Speaker 5

So I was just looking for some frame of reference of where we might see the NIM migrate to the next couple of quarters and into 2025?

Speaker 1

Sure. And so as I sort of indicated in our comments and John sort of touched on as well, we'll get the benefit of fixed asset repricing going forward, loan growth as well as the securities repositioning. And some of that will be offset by what we think is going to be more modest deposit repricing. And I can go deeper on that as far as what we see. But all that combined, Matt, I think we're at threethirty 2.

Speaker 1

I think you'd probably expect us to exit the year somewhere around the mid-330s on a NIM basis.

Speaker 5

Okay, great. And then, John, maybe you could touch on the commercial real estate NPL pickup. First of all, you mentioned it was a handful of loans, maybe a couple of loans. How many were in there, size? And then just some idea on resolution and expected loss content would be great.

Speaker 2

Sure. Happy to, Matt. So yes, the credit story obviously the headline here looks negative and because we had negative risk rating migration. But it really was sort of unique to a couple of discrete portfolios mainly in the office portfolio in CRE, which as you know is $950,000,000 Our NPLs in commercial went up $84,000,000 I believe and that was the result almost entirely of 4 office loans. So you get a sense again of the granularity, not huge single point exposures.

Speaker 2

And so the rest of the entire loan portfolio sort of behaved as you would normally kind of slowly migrating to normalized credit. With respect to loss content, it's awful hard. I mean, what I would tell you is we're looking at NPLs, obviously, we do a deep dive. We get updated appraisals. And so all of that is kind of factored into CECL.

Speaker 2

And so what I would say is in our 130 coverage ratio, we believe that obviously we have adequate reserves for any expected losses. I'd also tell you and it wasn't just a throwaway comment that 3 quarters of our office loans have some sort of credit enhancement, which doesn't really factor into the probability of default risk rating, but factors in our minds into loss given default. So things like debt service reserves, additional completion guarantees, extended guarantees from the sponsor and maybe bootstrap collateral from other property types, we think all will help mitigate losses. So again, we don't see loss content really impacting. We still look at our projected annualized charge off rate in that 25 to 30 basis point range.

Speaker 2

Obviously, as we always qualify, we say that in commercial lending, you can have a bigger quarter and a smaller quarter, but kind of at the run rate, we still think our losses are not going to change as we move forward. We're well reserved. And again, we're encouraged by the fact that everything you see from a credit perspective really in this quarter is a result of what happened in our office portfolio and a bit in C and I and I'll just $1,000,000,000 But as you probably know, industry wide, that's been a little bit challenged for things like labor availability, wage inflation, higher input costs and slower reimbursement rates. So again, we're encouraged by the fact that it's not a portfolio wide deterioration, but really into discrete portfolios that are relatively small and we think we have a good handle on.

Speaker 5

Great. I'll leave it there. Thanks for taking my questions.

Operator

We'll move next to Chris McGratty at KBW.

Speaker 6

Good morning.

Speaker 2

Good morning,

Speaker 6

Chris. John or Glenn, the I'm getting a few questions on the updated NII guide. I think in your prepared remarks, you said high confidence this is the last cut. Could you elaborate, I guess, on what would

Speaker 2

make it either conservative or

Speaker 6

a little bit aggressive at this point?

Speaker 2

Yes, Chris, that's an interesting one. The dynamic here has been a lot around, as I referenced in my comments, a lot around loan yields. And obviously, deposit costs have gone up modestly. We still have compared to industry favorable deposit costs and favorable funding costs when you look at the peer group or the broader industry. And what we missed, quite frankly, was number 1, our kind of gem of sponsor and specialty having higher yields at what we believe to be all day long a better risk adjusted return has really not grown significantly.

Speaker 2

We've had a lot of churn in the portfolio, decent originations, but losing the yield on 100 of 1,000,000 of dollars of anticipated sponsor and changing the mix of loan growth and having overall lower loan growth obviously hurt yields. There's also the dynamic of refinancings and repricings, which has slowed significantly to our original expectations. And kind of perversely, we believe that once the Fed starts cutting that while our repricing down on existing floating rate loans will obviously provide some sort of headwind that we also think that a lot of the repricing and refinancings will actually improve the loan yields as we move forward. So I guess if you were to ask me whether it's aggressive or conservative, what I would tell you is I think it's right in our model, the range. We've obviously adjusted down our expectations of the benefit of repricing and refinancings.

Speaker 2

We do anticipate a stronger second half in sponsor, but we're not relying on a spring back. We have a higher pipeline and we are seeing significantly more activity there, but we don't know what will happen with respect to churn in the portfolio. So I think it's our best case. And so if we get a more normalized origination channel and sponsor and we get some pickup in refinancing activities and as Glenn can talk about more with respect to pricing, we have CDs rolling off at higher levels than new CDs are coming on. We get some moderation.

Speaker 2

We could outperform the guide. What could have us underperform the guide is not being able to hit our what we believe to be reasonable and modest loan growth targets and a continued mix towards lower yielding assets. And so this has been a unique environment for us with an inverted yield curve. We missed the mark on the guidance obviously and we're not pleased with it. It doesn't make us happy.

Speaker 2

We've tried to pressure test where we are, but we think the guidance range we've given is neither conservative nor aggressive. It's kind of right in the middle of our updated assumptions based on the trends and the knowledge we know now.

Speaker 1

Yes. And if I can, John, just to add a little bit more on the funding side of it, right? So we did see the deposit cost go up 12 basis points and part of that was driven by lower average DDA balances. I would say that's probably about 3 basis points. As John mentioned, I mean during the quarter we had about $2,200,000,000 in CDs that matured and they matured at $404,000,000 and repriced at $443,000,000 That reverses itself as we get into the Q3 where we have about $2,400,000,000 in maturing CDs with a weighted average rate of 4.8 percent.

Speaker 1

And they'll reprice down to 4.5%. So that'll be positive and it will support the NIM going forward. And then the other thing I would say is that the DDA migration, we saw a $500,000,000 decline in the Q1. It's down to $300,000,000 About half of that $300,000,000 is public funds, which come back in, in the Q3. And so that we do think giving those dynamics that our both our deposit costs and our funding costs should moderate going forward.

Speaker 6

That's great. And John, if I could on capital, you said 11% by the end of the year, 10% over time. How does that play out for 2025? Does that mean growth do you expect growth to pick up and use capital that way? Or would you flip on the buyback again?

Speaker 2

Well, I mean, I think in our just given our profitability, we should be at 11 percent organically by the end of this year. And then I think it's looking at the operating environment, the expectations are that things are more normalized that we've got good line of sight that credit any credit migration has moderated. We feel comfortable about where we are. I think we go back, Chris, to kind of our general stated capital management program, which is if we have opportunities to grow our balance sheet organically in good returning assets, we'll obviously accelerate that. If we have an opportunity to continue to broaden like an Amitro's tuck in or do something from an acquisition perspective, we would.

Speaker 2

If not, we would absolutely turn back on the buyback and look at the dividend as well. So kind of that's the order of magnitude. And right now in our base case, our expectation is that once we crest year end, we're going to have good line of sight and visibility to where we are. We'll get hopefully some certainty around the path of rates from the Fed and we'll be back to managing our capital with that longer term 10.5% insight. But we're not going to do that before we feel very comfortable that we've got a not volatile macro environment.

Speaker 6

Thank you.

Speaker 2

Thank you.

Operator

We'll take our next question from Mark Fitzgibbon at Piper Sandler.

Speaker 2

Hey guys, good morning. Good morning, Mark. I noticed the average rate on the interlinked deposits this quarter was I think $5.57 Can you help us understand the thinking around adding sort of $1,100,000,000 this quarter in interlinked deposits? Do you expect those to reprice down? Or any color you

Speaker 7

could give would be great.

Speaker 1

Yes. Those are basically tied to Fed funds and it's client driven and so it depends on the new originations of that. But absolutely, as we look at the Fed making any kind of move, InterLink is one that would reprice down because it's indexed to Fed funds. So as the Fed begins to move those will reprice down.

Speaker 2

Okay. And then just a follow-up, and I'm sorry if I missed this earlier, but did you mention the $119,000,000 uptick in commercial non mortgage 30 day, 89 day delinquencies? What was that? Yes. It was a single credit, Mark, and it was actually a strong rated credit that just administratively didn't get fixed and rolled over by quarter end and it was cured the 1st week in July.

Speaker 2

So that went away and there's no credit issue associated with that spike up in delinquency.

Operator

Next we'll go to Steven Alexopoulos at JPMorgan.

Speaker 7

Hey, good morning everyone.

Speaker 2

Hi Steve.

Speaker 7

So I want to start to go back to the NII outlook for Amit. And then John, I know you said you stressed it, but if we get 2 cuts with the first cut in September and then another in December, does that bring you to the low end of the new range or does that bring you below the range? And then Glenn, in response to Matt's question, you said the mid-330s exit NIM, but I don't what if we get 2 cuts? What does exit NIM look like then?

Speaker 1

Yes. So just on the first question, let me take it. Because if you looked at our funding and our total balance sheet, so as I said in the past, of our $61,000,000,000 in deposits, about 20% of that I would characterize as high beta products. That's where you find the Intellect, some government banking, things like that, that reprice pretty quickly. So the 25 basis point reduction, you would expect that to come down.

Speaker 1

So take $12,000,000,000 probably get around, let's say $8,000,000 a quarter in benefit. Now the flip side is that we have about $23,000,000 or $23,000,000,000 in floating rate loans that would also reprice. And so that would be a net drag if you take those down 25 basis points. And then offsetting that are further declines in like the normal CD or the normal retail deposits that eventually drift down. And then we have we get the benefit of we put on hedges.

Speaker 1

It's probably beneficial to the tune of like $5,000,000 a quarter once the Fed reduces by 25 basis points. So if you put all that together, it's probably a net positive on a small basis. So think about $1,000,000 $1,500,000 in a quarter, right, if the Fed were to go in September. So it's basically neutralized. In fact, if you look at our slides back on 26, you can see that we've done a lot of work to sort of neutralize the balance sheet.

Speaker 1

And that's so we're well positioned, I think, for reductions. The second half of your question, I think, on I think it was on NIM.

Speaker 7

The NIM.

Speaker 1

Yes. And so that again, I think it would be driven by the same sort of factors. And you would expect it still the puts and takes to that still you'd get the benefit of the hedges, you get the benefit of the 20% of deposits repricing immediately, partially offset by the floating rate loans that reset. And so you'd probably still be in that mid-three thirty range on a NIM basis.

Speaker 2

So Steve, right. Steve, the high level just to repeat for the sake of repeating. When we did the merger, we significantly reduced asset sensitivity naturally in terms of the entire makeup of the balance sheet. And then with extending duration in the securities portfolio, the hedges we put on and the dynamics were significantly less asset sensitive than we were kind of last heading into the last rate cut cycle. So that's sort of the first premise.

Speaker 2

And then when you look at to Glenn's point, when we look at the difference between no cuts, a September cut, a September and a December cut, the actual quarterly impact is relatively modest just given all the inputs and outputs of the immediately pricing down deposits, the immediately lowering yield in the loan portfolio and then hedging and the other dynamics that we have in our balance sheet. So we don't see that as either a big tailwind or a big headwind as we look at the second half of the year.

Speaker 7

Got it. Okay. That's actually great color. If I could ask on the loan outlook because John, I know you said that, that was one of the drivers of why NII has been reduced. If I look at the midpoint of the new guide, it implies around $1,400,000,000 of loan growth at 20 $4,000,000,000 You're at $850,000,000 at the midpoint.

Speaker 7

So that implies about $600,000,000 in the second half to get to the guide. Quite a few banks who have weaker loan growth than you in the first half are guiding to an uptick in the second half. Why are you guys not expecting a bit of an uptick or at least continuation in the second half, particularly if we get those cuts, maybe it percolates demand a bit?

Speaker 2

It's a good question, right? You've been covering us for a long time and I've bragged about high single digit 10% commercial loan growth year in and year out. And over the last 10 years, we've done that with the exception of March Madness last year and the pandemic, right. And so I guess and I think one of the aspects and elements obviously is that we're deemphasizing CRE origination, so that has an impact. But I agree with you in the build and that's why we still think that 4% to 5% loan growth for the full year is attainable.

Speaker 2

The most granularity I can give you is we're up 1.7% year to date in loan growth on a stated basis. That's 2.2% loan growth in the first half if you adjust for the fact that we took commercial services and factoring and put it into loans held for sale. So I do have some confidence that we can do another 2.2%, 2.5%, 3% loan growth in the second half of the year. And I think if you ask me for kind of the geography of that growth, we are turning on and we have already started generating some mortgage growth and we think that now is the time that we can do that given our balance sheet. So that will be a contributor.

Speaker 2

Obviously, sponsor, we think, will have a better second half than first half. We've got public sector finance, which has a pretty good pipeline. We have fund banking, which although outstandings can be a little fluctuating. We continue to have really good sponsor relationships and the ability to do that. Lender finance, our traditional middle market, our business banking, our asset based lending, we still have a whole bunch of levers that we're pulling on.

Speaker 2

And we do think that the second half, our gut tells us, will be a more robust loan growth environment for the industry. But I think given what we've done in terms of missing people's expectations on NII, we're not going to overpromise. And so I think that our 4% to 5% seems to be grounded in reality, and it seems to be grounded in where we think we have confidence to get there. Could there be some upside in the second half, particularly with the Fed cutting and maybe with what happens in November in the election and people have a little bit more confidence? Sure.

Speaker 2

And I think that we'll position ourselves and we're ready offensively loan loan to deposit low loan to deposit ratio, lots of deposits and liquidity, we'll be able to take advantage of it. So I think our loan growth of 2.5% in the second half of the year is our base case best estimate. If it gets more difficult, we'll scrounge our way to get there. Is there an opportunity to maybe outperform that number in the second half given macro conditions? Sure.

Speaker 7

If I could just wrap, Glenn, thanks for all the years of providing really great color on the calls. When I think back 13 years ago to today, I mean, there's no comparison of the company today. And you leave Webster a big shoes to fill. So thanks for all that. Yes.

Speaker 1

Thank you, Steve. Appreciate it. Thank you.

Operator

We'll go next to Jared Shaw at Barclays Capital.

Speaker 8

Hi, good morning. Thanks. And I'd just like to reiterate my congratulations, Glenn. It's been great working with you and good luck with the next step.

Speaker 1

Thanks, Jared.

Speaker 8

Maybe just looking at credit and the reserves, I'm just looking at Slide 14 with the $55,000,000 provision tied to macro and credit. During the quarter, I guess, the Moody's base case improved. Is that then just all sort of due to credit migration within the portfolio? Or are you using a different weighting on some of the Moody's scenarios?

Speaker 1

Yes. So $61,000,000 provision as I mentioned does include about $10,000,000 of incremental reserve for the office portfolio. But I would say the remainder of that, so say $51,000,000 is our increase in reserves was a result of credit risk migration in the quarter. So Moody's as a whole from a macro standpoint was basically neutral quarter over quarter. So most of that was driven by the risk rating migration.

Speaker 8

Okay. All right. Thanks. And then we've been getting a lot of questions this past week on what some other banks are paying on their sweep accounts and people are trying to see how that impacts or how HSA could be impacted by that. Could you just give an update on how confident you are with the HSA structure in terms of not being caught up in this sweep account discussion and just confirm that this is not serving an ERISA type of a product for us?

Speaker 2

Yes. There's nothing right now that would suggest and I think we take a pretty standard approach that we're a nationally regulated financial institution not in the business of providing fiduciary services or investment advice. And so obviously, we've been on top of it working with the HSA team and our legislative team. We do not see that we would be subject to those new rules.

Speaker 8

Great. Thank you very much.

Speaker 2

Thank you.

Operator

We'll move next to Manan Gathalia at Morgan Stanley.

Speaker 9

Hey, good morning. I wanted to ask on the expense side. You kept the expense guide unchanged while cutting the NII guide. So do you see any potential offsets on the expense side if revenues remain under pressure here?

Speaker 2

Yes. I mean, I think that where we are is, as we think about investing in the business, we think about investment in risk and our march to Category 4. We don't see any near term pressures on hitting our guidance on expenses. I think we've been conservative in sort of keeping that expense base to make sure that we can continue to invest in the company. And I always remind people that we're starting from 40s efficiency ratio, which is 10 percentage points below our peer group.

Speaker 2

Do we have opportunities as things shift in terms of our capital allocation to different business lines? Do we have opportunities to make organizational efficiencies? We do. We're examining those, but we thought it was premature to cut our expense guidance at this time. Obviously, as prudent managers, we need to do things to we promised market leading returns over time as there's pressure on revenues, we need to make sure we right size our expenses.

Speaker 2

I do think we have some opportunities. But at this juncture, given the makeup and given where we are and the opportunities we see in front of us, we're sticking with our initial guidance. And we'll do everything we can to bring that in at the low end of

Speaker 1

the guidance. Yes. And I would just keep in mind that given our guidance, if you look at it on either side, the low end or the high end, it's about $100,000,000 say, of an increase. And of that increase, about half of that is on the Mitros platform. So it's the operating expense and the intangibles associated with Mitros.

Speaker 1

And then the other two pieces are basically performance based compensation and investments that we've made in the business, whether it's HSA or in the commercial business or in the operations side. So there's that's the broad brush of what the increase is. And I would just point to that investment in Ametros, as you can see on the numbers and the financials, is beginning to pay off already.

Speaker 9

Got it. And then separately, can you talk about what's driving the decisioning for securities repositioning? So you're locking in high rates ahead of rate cuts? Are you taking advantage of the lower mark to market? Is it the capital accretion from each quarter?

Speaker 9

So just talk about what's driving the decisioning? And what duration you're putting on the securities book and if you have room to do more on the repositioning side? Thanks. Yes. Glenn will give you some of

Speaker 2

the financial details, but I think you just hit on the number of factors. So basically, one of our primary objectives is to accrete capital back to 11% on CET1. So I would say that what has been driving us to opportunistically look at balance sheet repositioning has been the desire for capital neutrality, looking at the earn back period. And you'll see that the moves we've made thus far this year have been really short payback periods. And so that all factors in and we'll look obviously, we have no plans to do anything right now, but we'll continue to look opportunistically based on all of those metrics, the impact to earnings, the impact to capital and the earn back period on the move.

Speaker 1

Yes. The only thing I would add is that year to date we've done about $1,300,000,000 in restructuring. And you said the biggest piece was in the 2nd quarter. But as I indicated in my comments, we're picking up about 400 basis points on yield and the duration is staying around 3.7 years. So that helped our asset sensitivity as well.

Speaker 1

But I don't think that once we start looking at other tranches, the earn back continues to increase. So it's something we're monitoring. We do a pretty thorough job in just looking at the securities portfolio continuously. But I don't think that you'd expect to see another $1,300,000,000 or $1,400,000,000 in the immediate near term.

Speaker 9

Great. Thank you and all the very best, Glenn.

Speaker 2

Thank you.

Operator

We'll take our next question from Casey Haire at Jefferies.

Speaker 10

Great. Thanks. Good morning, guys.

Speaker 2

Good morning, Casey.

Speaker 10

So wanted to touch on the fixed rate asset repricing and the loan yields. So it sounds like the you guys are stepping away from CRE here and are going to be doing more sponsor finance. I'm just wondering the new money yields in the Q2 versus new money yields of what's in the pipeline currently?

Speaker 1

Yes. So let me just if I can, Casey, let me just talk about the yield quarter over quarter. There's been some questions about that. So 6.23% versus 6.24%. And as I look at that, like there's headwinds and tailwinds on that.

Speaker 1

And so I think part of the decline quarter over quarter was lower loan marks and that was worth about 1 basis point. And then we did move commercial services up to held for sale. That was also a drag of 1 basis point. The hedging cost on the CRE portfolio was worth another basis point. And so those are sort of big things and then mix higher mix to CRE and public sector finance.

Speaker 1

So you have that headwind going against you. And then part of what we've seen going the other way are we are seeing like the sponsor and specialty book up 17 basis points, middle market up 9 basis points, fund banking up 9 basis points. So on a weighted basis that calls back about 3 basis points. So that's the dynamics of the net one down in basis point quarter over quarter. And so our total for the Q2, our total origination coupon rate was like 7.75 dollars And I think that's fairly consistent with where we were in the Q1 as well.

Speaker 2

And Casey, just to give you like a little of market comp. So our originations in the Q2 with respect to sponsor being down as well and we had some fund banking growth, a little bit of Cregos and public sector finance growth. You're looking at SOFR plus mid-2s on some of those deals where sponsors were sulfur+3.50 to sulfur+4. And so the origination yield mix has a significant impact. We do see more activity.

Speaker 2

And I would qualify your comment. It's not like we're overemphasizing sponsor. I think we're growing all of our other asset classes, but the expectation is it will have more normalized sponsor growth, which has a positive impact on overall loan yields.

Speaker 10

Got you. Okay. And then just the so the CRE concentration, last quarter you guys talked about a goal of getting that working that down over the next 4 to 6 quarters. You also seem open to divesting of some CRE. Just wondering what is the current thinking on reducing the CRE concentration and do you get there organically?

Speaker 2

And that's Yes. It's a great point. I think there will be more than just organic. There will be opportunities. I have nothing to sort of announce on this call.

Speaker 2

But if you think about some of the things we're working on, we have agency eligible loans that we can securitize. We've got interest in continued loan sales, particularly on floating rate, high quality loans where they may not be strategic deposits alongside of it. So you can rest assured that all of the potential opportunities to potentially have step function reductions

Speaker 7

and by

Speaker 2

the way, provide us with more opportunity to continue to support our existing great relationships with Cree folks because we're certainly not out of that business, But there are ways where we can moderate and keep flat our growth as we accrete capital and grow the other loan categories. So I would say that you'll hear us in the next several calls tell you about opportunities that have been kind of neutral to earnings. Obviously, we're losing earning assets, but in terms of not selling at discounts, we have opportunities to make good economic decisions as we grow other asset categories and free up opportunities to grow really good CRE with strong relationships and deposits. You'll hear us talk about some of the moves that we'll make to accelerate and move away from just organic flattening of that portfolio. But yes, I think we're still on track to get into that 2.50 ish range in the next 3 to 4 quarters.

Speaker 2

I think I said last quarter 4 to 6 quarters. So whatever that is now, 3 to 5 quarters, we still think we can get to $250,000,000 And then we have to talk about and decide as we move forward the makeup of the balance sheet, our origination and distribution capabilities because we've got some really good capital markets people in CRE as well. So that as we kind of march over the next 3 years closer to Category 4, whether that and how we get that exposure even lower between 200% and 2 50%.

Operator

We'll go next to Daniel Tamayo at Raymond James.

Speaker 11

Thank you. Good morning, everybody.

Speaker 2

Good morning, Dan.

Speaker 11

Maybe just a quick question on the office portfolio and the migration that we had in the quarter. Just curious if there was kind of put you could connect dots in between those four loans, if there was anything that they had in common. I appreciate the data that you have on the New York City exposure, which looks like that was part of it. But curious just location wise, size wise, anything else you can talk about of those properties that may be connected relative to the rest of the office portfolio? Yes.

Speaker 2

Actually, there were no geographic connectivity. 3 were in our kind of branch footprint. 1 was outside of our branch footprint with an in market sponsor. I would say the things they have in common, stress on rents and NOI and lower appraisals. And so that's what drove that migration.

Speaker 2

So I would say nothing related to specific underwriting team or specific pressure in one geography. It's the overall pressure on office and rents occupancy at value.

Speaker 11

Okay, great. And then you mentioned you don't expect risk migration to continue at this pace. What gives you confidence when you say that, particularly, I guess, in the office book that as maturities continue to come up that we might not continue to see loans deteriorate there in a meaningful way?

Speaker 2

Yes, Daniel, that's a really good question. And as a former Chief Credit Risk Officer, I always hate to kind of forecast credit performance. And that's why I qualified the statement by saying assuming that the macro conditions stay the same and we don't get any big surprises. I think what gives us general confidence is and we've talked about this before, Jason and his team have continued to do quarterly deep dives into those portfolios that evidence the most stress. I mentioned earlier that we still have really concentration in credit pressure in the $950,000,000 office portfolio.

Speaker 2

The rest of CRE is actually performing really well and performing actually at a better rate than overall C and I, which you've heard other people mention on calls as well. And then within C and I, we sort of have this little pocket of healthcare services, which is also under $1,000,000,000 a little bit in food and restaurant, which is a relatively small portfolio, but couple of pockets of concentration. And so with these deep dives across the portfolio and with our what I believe to be proactive and conservative risk rating biases, we don't see as we're going through our problem asset reports as we're looking at things kind of significant deterioration outside of those pockets. And my hope is that our team has captured the current risk profile in those two portfolios. So that's why when we look and we do roll rates and we look forward, we certainly don't see similar migration in Q3.

Speaker 11

Okay, great. Thanks for the color, John.

Speaker 2

Appreciate it. You got it. Anytime.

Operator

We'll go next to Bernard Von Giuseppe at Deutsche Bank.

Speaker 12

Hey guys, good morning. Good morning.

Speaker 2

So John,

Speaker 12

you noted the partnership with Marathon will provide more capabilities for clients and allow WebSphere to participate in bigger loan deals that you wouldn't have been able to do so otherwise due to size limits. I'm just wondering, will you be expanding the credit box to participate in deals? How does underwriting standard the Marathon compare to the credit culture at Webster?

Speaker 2

Yes. Well, the only thing I will say, and obviously, we actually after the announcement, we just signed the JV. We plan on everything going live towards the end of Q4, maybe the beginning of Q1. And so I'm not going to comment on any details, but I certainly can answer your question. It should have no impact functionally on how we operate, how we originate loans, how we go to market with our sponsors.

Speaker 2

It does give us more balance sheet flexibility and it does give us the ability to continue to move up market and keep our bank balance sheet hold levels similar, but also be able to do larger transactions because there is a natural partner to be able to warehouse and hold the higher portions of the bigger loans. And so I think the key message for us to you is that it's not going to change the risk profile of the bank. It doesn't dilute or change our focus on what we're doing for the bank's balance sheet or the bank's earnings profile. It just gives us more flexibility, optionality and basically a larger overall balance sheet, if you will, to be able to fund larger loans.

Speaker 12

Okay, great. And then just following up, I know earlier in the call, you did mention some of the pressure in sponsor was related just to the increased competition from private credit. Obviously, you've done the JV. Just any comments, anything you can elaborate on what you've been seeing with that increased competition specifically and the impact on sponsor?

Speaker 2

Sure. And I don't think this is a secret to anyone, right? We have seen the proliferation of private credit impact. We've been in this business as you know for a long time. And even going back 10 years, many of our primary competitors were BDCs, finance companies, sort of private credit as defined 10 years ago.

Speaker 2

Obviously, now there's 1,500,000,000,000 dollars in private credit out there. And so what you've seen the impact on banks overall has been on capital markets fees, underwriting and syndication because private credit extends the leverage profile on loans. They hold larger pieces of loans than our prudent 4 bank balance sheets to hold. And I would say since March madness of last year, there's been an acceleration. The key for me to talk about is that it doesn't render us non competitive.

Speaker 2

Many private equity firms and many of the ones that we deal with in sectors we know well prefer to deal with banks. There's a different relationship style. There's a different management process when things go sideways. There's the full capabilities of a bank with respect to swaps and FX and cash management and treasury products. But it has had an impact on spreads, and it has had an impact on sort of the number of swings we get at the plate.

Speaker 2

And so but I do think that for the 1st two quarters this year, it's been more activity based than competitive based that's muted the growth in that area. So I do think with some of the tools we're building, we can remain very competitive with our existing sponsors and continue to grow that business. But there is no doubt that private credit has become more relevant in the financing space, and I know it's impacting the entire industry.

Speaker 12

Okay, great. Thanks for the color and thanks for taking my questions.

Operator

We'll go next to Timur Braziler at Wells Fargo Securities.

Speaker 13

Hi, good morning.

Speaker 2

Good morning, Timur.

Speaker 13

Circling back to the office discussion, I'm just wondering what drove the updated appraisals this quarter? Were the loans coming up for maturity? Was there something else? And then maybe just provide an update for the remainder of the book, what portion has recent appraisals on it?

Speaker 2

I didn't catch the last part, but I'll ask you for that again. The first part is just the general normal processes, either risk rating, migration, certain levels of debt service or approaching maturity that we will order appraisals and then take into consideration the entire value of property, NOI, debt service coverage in terms of making a risk rating determination on accrual or non accrual. So that's like standard operating procedure. What was the second part of that question?

Speaker 13

Just what portion of the office book now has updated appraisals on it?

Speaker 2

I'd say maybe 40%. Okay.

Speaker 13

And then second from me That's just

Speaker 2

swag, by the way, but I think that's probably pretty close to accurate.

Speaker 13

Okay. Yes, I appreciate that. And then just on the HSA business, the migration from deposits to investments seems to be accelerating maybe here a little bit. Can you just talk through that dynamic and just remind us how you monetize the investment

Speaker 2

component of HSA? Yes, sure. Obviously in a higher rate environment as well, we have seen migration. We always remind folks that if you look at the dynamics of the various spenders, savers and investors that investors still have significantly higher average deposit balances than spenders. So we as people continue to invest, while that takes some deposits away from us, that the underlying deposit base of those investors is still very, very strong and profitable.

Speaker 2

We make significantly more money particularly in this rate environment on investment offerings that are not only and most investment offerings that are not only and most importantly, better experiences for our clients, but also that give us slightly more economics. So we're moving it in the right direction. But at the end of the day, we make a fraction of what we make on deposits based on the value of deposits now than we do on a dollar of investment. The only thing

Speaker 1

I would add, Timur, is that our business like $3,000,000 accounts, about $2,000,000 or 75 percent, let's say, is are still spenders. So they have an average balance of $4.75 right? And so and then if you go to the Sabre profile, they have an average balance of about $8,000 And then the investors are only 8% of our accounts. So and that's up to your point, very good point, from 5% say a year ago. But they still maintain an average balance of like $6,000 and they have a $20,000 investment balance.

Speaker 1

So we still get the benefit of the funding advantage on our balance sheet. I think the opportunity for us is obviously to educate those spenders on the benefits of savings, the triple tax free nature of it, such that they become more savers. And so that's and I know that's something that Chad and his team are always have been focused on.

Speaker 2

Great. Thanks.

Operator

We'll go next to Laurie Hunsicker at Seaport Research Partners.

Speaker 7

Good morning, Laurie.

Speaker 4

Hi, good morning. Glenn, I just want to say congrats and best wishes. So my question is really sort of multipronged around commercial credit, not to beat a dead horse here, but just want to understand, so the $61,000,000 loan loss provision, less the $6,000,000 growth, but down to $55,000,000 How much of that specifically was office? How much of that was also your sponsor and specialty? And then I know you mentioned that the office reserves grew by $10,000,000 What is your specific office reserve now?

Speaker 1

So let me take it one at a time and John can jump in here. So of the $61,000,000 as I indicated in the comments, about $10,000,000 is office, right, of that $61,000,000 And I think on the sponsor book, I don't have the absolute dollar number, but I know our coverage ratio is up 2 percent. It's 2%. Yes. Yes.

Speaker 1

I'll add that 2%, I'm sorry. So I'll add to that.

Speaker 4

Okay. So the so but just the $10,000,000 was office and you said that obviously you had credit risk migration. So that's only $10,000,000 of your $61,000,000 dollars in loan loss provision was related to office. Is that correct?

Speaker 1

That's correct. Yes. Laurie, if

Speaker 2

you think about it, we already had ratings on those non accruals were likely in substandard already or had specific reserves against them. So at the end of the day, that's the incremental reserve amount for the quarter. Yes.

Speaker 4

Perfect. Perfect. Okay. And your sponsor and specialty book, what are the non performers there now? And then just one last follow-up on charge offs, the $33,000,000 that were commercial, how much of that was office?

Speaker 4

And then or even if you have the split between CRE and C and I, obviously, how much was office? And then also how much was the sponsor in specialty?

Speaker 2

Can you repeat that question, Maury? 2nd question.

Speaker 4

Sure. Yes, of your charge offs of 33,000,000 in you know, it was mainly all commercial, 33,000,000 in charge offs. Just looking for the split between CRE and C and I. And then just also specifically, what were your office charge offs? And what were your sponsor and specialty charge offs?

Speaker 4

And I mean just the sponsor and specialty nonperforming number that I had from last quarter was $135,000,000 I just want to make sure I have a refresh there.

Speaker 1

So we

Speaker 2

had total charge offs in the quarter of $33,000,000 $10,000,000 of that were proactive loan sales, mostly in CRE. And so of the actual kind of liquidated charge offs, normal course charge offs, We basically had a traditional office loan. We had a loss in ABL and a small loan in sponsor of 5,000,000 dollars So that's the makeup of the charge offs, which were actually down from last quarter.

Operator

We'll move next to Samuel Vargas at UBS.

Speaker 3

Good morning. I just wanted to go back to the loan and deposit guide for a second. On the loan growth guide, I appreciate all the color you've provided so far this morning. Can you just, I guess, name sort of some of the categories that you're most confident in for the second half of the year loan growth?

Speaker 2

Sure, I will. And before I do that, I'm actually going to answer Laurie's last question even though she's not on the phone. The NPLs and sponsor are flat to last quarter. So that same number you're looking at, Laurie, and I apologize for you getting cut off there. Yes, I mean, I think we have, as I said, if you look and I think Steve made the comment, it's somewhere between $850,000,000 $1,400,000,000 in that 4% to 5% range in terms of what we would need to do in the second half of the year.

Speaker 2

There's no one concentrated category, but if you think of a a few $100,000,000 in mortgage as a start and a contribution, a couple of $100,000,000 in lender finance, a couple of $100,000,000 in fund banking, a little bit more in traditional middle market C and I and then some smaller but material amounts in public sector finance and then contributions from ABL and Business Banking. I think that's how we build that. So it's not either throwing the bomb or putting emphasis on one category. It's using the portfolio of levers we have to have kind of diversified and robust loan growth. As we said, there may be CRE will be bounced around, maybe flat, could be up a little bit depending on the actions we take.

Speaker 2

But it will be a pretty diversified loan growth with maybe the addition from last couple of quarters of some more originations for holding in our residential mortgage, but kind of the same categories that have been contributing and hopefully a more robust sponsor quarter.

Speaker 3

Got it. Thanks for that. And then just switching over to the deposit guide. Is it fair to look at the deposit guide as a derivative of the loan growth guide? And you don't want to put on extra liquidity if you're able to drive more deposits?

Speaker 3

Or are those 2 more of a separate thought process for you?

Speaker 1

Yes. No, I think that's fair. It is the pricing anyway and therefore the deposit balances are driven by the funding nature of the loan book. So yes, we manage it that way along with broker deposits and wholesale funding as well. So those are the dynamics we look at.

Speaker 1

I think as you look at the guide, like I said, the cost will moderate. That's how we're thinking about it right now. So there's opportunity for us. And I think when you look at that second or third page of our deck, you can get a sense of the diversification and the levers we can pull to optimize that mix.

Speaker 2

And InterLink is the real lever. The other deposits we want, right, regardless of what loan growth, the strength of our franchise is growing core operating deposits. So we want HSA to maximize its growth, the metros to supercharge its growth and we want all of our middle market and commercial real estate and commercial and business banking activities and our retail bank to continue to grow good relationship deposits at reasonable prices. So that's really not a factor of what we see available to us on the asset generation side. That's a factor of continuing to grow the value of our deposit franchise.

Speaker 2

But I do think Glenn's right as it relates to what we look for with respect to interlinked growth or other brokered CDs or other things, that will be a function of deploying that liquidity for asset growth.

Speaker 3

Got it. Thanks for the color.

Operator

And that concludes our Q and A session. I will now turn the conference back over to John for closing remarks.

Speaker 2

Thank you everybody for joining us today. Have a great day. Thank you.

Operator

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

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