WBS - NYSE

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. Harmon, please go ahead.

Good morning. Before we begin our remarks, I want to remind you that the comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 will now turn it over to Webster Financial CEO, John Ciulla.

Thanks a lot, Emlen. Good morning and welcome to Webster Financial Corporation’s first quarter 2023 earnings call. We appreciate you joining us today. I will provide remarks on our high level results and strategic positioning before turning it over to Glenn to cover our financial results in greater detail. First quarter of 2023 was a memorable one for the banking industry, unfortunately highlighted by high-profile bank failures that caused dislocation across the system. The good news is that the industry remains fundamentally strong and well capitalized and the near-term view is less volatile than a month ago. Webster’s results in the quarter are reflective of our resilient business model 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. 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% was up from 1.37% 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%. 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 will 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, two topics that I know are of significant interest. I am on Page 3 of our presentation. The unique qualities of our deposit franchise remain a core strength of Webster. Our deposits consist of $24 billion of consumer deposits largely originated in our retail footprint to long-tenured clients. $8 billion of HSA Bank deposits, the entirety of these deposits are individual customer accounts and nearly all are within FDIC insurance coverage limits, and as you know, HSA deposits are long duration and low cost. $2 billion of business banking deposits within our commercial bank. Generally, these are smaller dollar and behaved similarly to those in the consumer book. $5 billion of public fund deposits within the commercial bank, the majority of which are collateralized with highly predictable behavioral characteristics. Our remaining commercial deposits of $11 billion are diverse by industry, customer type and geography. There are no sector concentrations and these deposits are relatively small balance in nature with an average balance of less than $200,000 per account. I will refer you again to Chris Motl’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 first quarter has already proven to be highly valuable, provides readily available core deposit funding to almost all FDIC insured deposits and we have access to these funds at a very low cost of acquisition. In summary, between the Consumer Bank, HSA and interLINK, 63% of our total deposit accounts are consumer-oriented, small balance accounts that are long duration in nature. The past month 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. In mid-March, within the Commercial Bank, we saw elevated two-way activity for a few days as clients look to diversify their deposit concentrations, but that activity quickly resumed its normal course. I would also note that we have opened approximately 500 accounts, primarily operating accounts that are in the process of being funded with new commercial depositors since the middle of March. In addition to the strength of our overall deposit franchise, we maintained significant alternate sources of liquidity. This is displayed on Slide 4. As of yesterday, we had $16 billion of immediately available liquidity between 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. As it relates to credit, at Investor Day, Jason Soto, our Chief Credit Officer, detailed the quality of our loan portfolio. We are proud of our credit risk framework and our risk selection. For many quarters, our origination efforts have been focused on existing customers and higher rated loans. Our strict underwriting standards include stress testing, economic and interest rate sensitivity and we continue to perform robust reviews of portfolio segments that are sensitive to environmental trends. We proactively sold loans last year, where we believed it would be our economics and help reduce future credit risk. The net result of all of our actions is that the weighted average risk rating in our loan portfolio has improved over the past year, each quarter and is unchanged on a linked quarter basis. As you will see in our disclosures, the level of classified assets in our portfolio has remained stable as well. On Slide 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, has a low ad origination LTV, a strong current and updated debt service coverage ratio profile has limited lease maturities in each of the next 2 years is diversified across geographies and thus far continues to perform well. In fact, criticized assets have fallen to 4.7% of loans from 6.6% of loans in the fourth quarter of ‘22. I will also remind you that the $1.4 billion in office exposure is down $260 million or 15% from the close of our MOE as we were proactive in managing this portfolio during ‘22. And we have originated only a nominal amount of office exposure since the two banks came together a year ago. With that, I will turn it over to Glenn to review the financial statements in more detail.

Thanks, John. Good morning, everyone. I will start on Slide 6 with our GAAP and adjusted earnings. We reported GAAP net income to common shareholders of $217 million with earnings per share of $1.24. On an adjusted basis, we reported net income to common shareholders of $259 million and EPS of $1.49 after excluding onetime after-tax expenses of $42 million. Merger expenses were related to professional fees, severance and other compensation-related charges and a provision adjustment for acquired unfunded lending commitments. The strategic initiative expense is related to repositioning of our securities portfolio. Next, I will review balance sheet trends, beginning on Slide 7. Total assets were $74.8 billion at period end, up $3.6 billion from the fourth quarter as we bolstered our balance sheet liquidity and had $1.2 billion in loan growth. Our securities balance increased modestly in the quarter. As discussed at our Investor Day, we sold $400 million in lower yield securities in January, recording a loss on sale. 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 million from $631 million last quarter. In a steady interest rate environment, we anticipate roughly $85 million of this will accrete back into capital annually. Loan growth was $1.2 billion, driven primarily by commercial banking. Deposits were up $1.2 billion from quarter end, reflective of growth in interLINK, HSA and our CD portfolio and match our quarterly loan growth. From quarter end through April 19, deposits have grown another $2.8 billion. Borrowings increased by $2.3 billion as we enhanced our liquidity position in light of recent market events. Our borrowings included $8.6 billion of 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 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. Loan trends are highlighted on Slide 8. In total, we grew loans by $1.2 billion or 2.3% on a linked quarter basis. Loan growth was diverse by category. Commercial grew by $540 million, commercial real estate grew by $900 million and residential mortgage balances were up modestly. The yield on the portfolio increased 55 basis points as loan yields outpaced increases in deposit costs. Excluding accretion, loan yields increased by 56 basis points. Floating and periodic rate loans remained approximately 60% at quarter end. We provide additional detail on deposits on Slide 9 with total deposits up $1.2 billion from prior quarter or 2.3%. In addition to growth in interLINK and HSA, we added $370 million 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, HAS, and interLINK, 63% of our deposits are in consumer-oriented loan duration categories, and to a large extent, fully FDIC insured. 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 first quarter of 2024 with a more significant ramp in the second quarter, followed by fairly steady progression throughout the remainder of the year. Moving to Slide 11, you can see our reported to adjusted income statement compared to the adjusted earnings for the fourth quarter of 2022. Net interest income was down $7.1 million or 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 million while expenses remained effectively flat. I will 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 $7.1 million 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 $4.4 million or just 0.7%. 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 as we enhanced our liquidity position. Total cost of funds was up 60 basis points quarter-over-quarter. Slide 13, which highlight our fee income for the quarter. On an adjusted basis, fees were down $19 million linked quarter. The primary drivers of the decline were lower direct investment income, lower client hedging activity and valuation marks and lower client contract fees. I will detail 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. Non-interest expenses are highlighted on Slide 14. We reported an adjusted expense of $303 million, in line with prior quarter. The results reflect lower compensation and marketing expenses, which were offset by an increase in the FDIC assessment rate, intangible amortization on interLINK, and operating cost 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 million over prior quarter. After recording $25 million in net charge-offs, we incurred $38 million in provision expense with loan growth, representing $12 million and the macro and credit factors, $26 million. Additionally, we completed the adoption of the TDR accounting rules effective January 1 of this year. This resulted in a $6 million increase in reserve, which was recorded as a charge to retained earnings. As a result, you will see our coverage ratio increased modestly to 1.21%. Slide 16 highlights our key asset quality metrics. On the upper left, non-performing assets declined $19 million from prior quarter and represent 36 basis points of loans. Commercial classified loans as a percent of commercial loans declined to 1.47% from 1.5% despite a modest increase of $6 million on an absolute basis. Net charge-offs on the upper right totaled $25 million 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% and our tangible common equity ratio was 7.15%. Our tangible book value per share increased to $29.47 a share from $29.07 in the last quarter. Including both AFS and HTM marks on our securities 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. I will 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 billion to $2.425 billion on a non-FTE basis, excluding accretion. We expect $25 million in accretion would be added to that interest income outlook. For those modeling on net interest income on an FTE basis, I would add roughly $65 million 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 million to $400 million. Core expenses are expected to be $1.2 billion to $1.225 billion with an efficiency ratio of roughly 40%. We expect our effective tax rate to be in the range of 22% to 23%. We continue to be prudent managers of capital. Capital actions will be dependent on the market environment. We continue to target a common equity Tier 1 ratio of 10.5% over time. With that, I’ll turn it back over to John for closing remarks.

Thanks, Glenn. On Page 19, I’ll briefly hit on the next steps of our merger integration, as we have 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 first 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. 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 to continue to reprice higher and we will continue to lock in the benefits of a higher interest rate environment. The full year guidance we provided today is based on our best thinking around our base case for the impact of macro factors and it’s too early to anticipate all of the effects of the recent events, including future regulatory costs or the depth of a potential recession later in the year. With that said, it’s our strategic aim to ensure we continue to position our bank to support our key clients and business segments through any operating environment. We will continue to prudently grow loans and add franchise enhancing full relationships all within the confines of the credit economic and funding environment. This will likely mean closer scrutiny of new and existing businesses and continued focus on funding loans with growing core deposits. We will continue to be good stewards of capital and we manage our balance sheet in an efficient and prudent manner depending on the environmental opportunities and/or challenges. In summary, we expect we will continue to generate return to the top of our peer group, thanks to the strength I have highlighted today. I want to make this important point, we believe that based on our guidance we have provided, our year end performance metrics will continue to meet or exceed the targets we set forth, not only at merger announcement but at Investor Day last month, that’s an ROATCE of approximately 20% and ROA in the 1.5% range, and efficiency ratio around 40%. We believe those metrics will still be kind of best-in-class in our peer group. Thank you to our colleagues for their exceptional work in this quarter. They made special efforts to engage and stay in front of our clients and have kept our organization operating at a high level through an unusual period. And before I conclude, I just want to express our support for our colleagues Gold National Bank after the event that took place earlier this month in Louisville, we know a number of individuals there. They run an organization a very strong character, and we want Jim Ryan and their entire team to know that Webster and the rest of the industry has them in our thoughts. Operator, and I will open it up to questions.

Thank you. [Operator Instructions] Our first question comes from Chris McGratty from Keefe, Bruyette & Woods. Please go ahead. Your line is open.

Good morning.

Good morning, Chris.

Just want to make sure the 20 ROATCE, the 150 and the 40. What was the time period again, just want to make sure I got it?

It’s a 2-year merger. So I think fourth quarter ‘23.

Okay. Great. 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 maybe the implications for borrowings and ultimately, just where you wanted the loan to deposit to settle?

Yes. Thanks. So Chris, let me take that. It’s Glenn. Good morning. So we think that the interLINK will probably close the year closer to $5 billion right now. And so November, as of – I mean as of now, we’re at almost $3.5 billion as of yesterday. So we’re well on the path there.

And Chris, we have talked about the beauty of that is it’s a lever we can pull just 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.

And then just lastly, on the buyback, obviously, a lot of your period is going back because of the macro uncertainty. I guess where do you shake out in terms of thinking about this in terms of timing?

Yes, I think that’s great. Obviously, with the uncertainty in the market, we – in the first quarter, we weren’t active. And in the second quarter, 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 hundred million dollars in buybacks in the third and fourth quarter. But again, I always want to caveat that with the fact that we will be prudent given the environment that we will be in. But certainly, at this valuation, it’s an attractive investment for us to return capital that way.

Alright. Thanks a lot.

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

Yes. Thanks. Good morning, guys.

Hey, Casey.

Couple of questions on the expense front, so the strategic expenses up in the quarter. Was any of that relating to the control issues around – that caused the 10-K delay?

Yes. The answer is no. It has to do with what we’re doing with respect to our conversion and other merger-related charges. So, we have not had material expense increases related to resolution of the MW and we are well on the path of remediation of all that, too. So it’s not going to pop anywhere.

So consistent with what you guys talked about at Investor Day, this is not going to have – 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 first quarter, 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 you’re still holding that efficiency ratio?

Yes. So you saw our expenses for the first quarter at $303 million 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.

Yes, Casey, if you again, look at the middle range of our guidance, I think that comes out to about 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 will be right in that 40%, low 40s, 40% range.

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 at Investor Day, to 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.

No, I think what we’re – where we are is kind of the industry growth slowed a little bit. We’re pretty happy with where we are with respect to year-over-year in the first quarter growth. So I would say I don’t think it’s anything unusual. Casey, we’re still bullish that it’s very difficult to find deposit growth in the high single digits on low-cost deposits, so nothing unusual. And actually, I think we had a pretty good quarter relative to what Devenir and year-over-year relative to what Devenir showed in terms of industry growth.

Great. Thanks, guys.

Thank you.

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

Good morning. I wanted to touch on credit. First, could you just give us some sense on loan resets for commercial real estate, what 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? 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 or reacting to these changes?

Yes, it’s interesting. It’s hard to give sort of a blanket response to that because what we’re seeing is maturities obviously, what we’re doing is we’re renegotiating with borrowers. They are putting in either more proceeds or rates are increasing if we’re taking a little bit more risk on the LTV and debt service coverage ratios, I’m trying to pull up some data I have around. I think we are a couple of hundred basis points up from a cap rate perspective. 6.2% was our kind of all-in yield. That’s probably up in March in commercial real estate. That’s probably up 250 basis points since the ‘18 and ‘19 range. And that’s kind of what we’re originating now. I’d say some of the research we have, Matt, shows that like if a 10% decline in NOI increases – I’m sorry, impacts DCR, about 17 basis points. I’m trying to think of my LTV number that I had here, give me 1 second. A 100 basis point increase in cap rates increases LTVs by about 10% to 12% in our portfolio as we’ve been going down and reviewing all of those dynamics. So what I would say is we’re not seeing any issues with respect to current debt service coverage on our commercial real estate. And as it’s coming up for renewal, we’ve been taking really aggressive proactive steps to either rightsize 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 in office, we’re in pretty good shape there. And I think on one of the slides in office, we showed the maturities left this year. We’ve already kind of resolved about $200 million in maturities in office in 2023, and we did that by either getting additional credit enhancements, paying down the proceeds and working and getting additional equity from our borrowers. And obviously, as we’re settling those at the new yields, we’re still comfortable that we’ve got reasonable debt service coverage, and we’re still within LTVs.

Understood. Okay. 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?

Yes. I guess we look at it two ways, right? So you think about managing from a credit perspective, all of our New York City real estate exposure. And I think the critical thing is we look again at having strong borrowers, strong sponsors, strong property and conservatively underwritten loans. And so while, obviously, we believe that they’ll be stressed, particularly with the loans that Signature Bank we will be selling in the New York Community Bank didn’t buy. We’re not too worried about the impact on the overall market as long as we’ve got really good 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 is no cliff there, right? We’ve got limited maturities, strong lease flows, good LTVs. And so we’re working with each of our individual borrowers as we move forward. I think as the dust settles, Matt, and we think about opportunities in the market, we do believe that there’ll be potentially teams available. We do 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, 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 is an opportunity for us to continue to smartly grow our book there, but we’re also very cognizant of the market dynamics in New York right now, the potential for a recession at the end of the year. So what I’d say is, yes, opportunity in the future, but really prudent about how we go about deciding where and when to take that share.

Got it. Understood. Last one for me. Just on interest rate sensitivity, I see in the down rate 100 basis point scenario. I think NII is down now about 2.8%. This is off from, I think, 3% at year-end. As you continue to move the ball forward on this front, by the time we do get to 2024 and potentially close to rate cuts, where do you expect the balance sheet sensitivity on this metric to be?

Yes. So let me take that, Matt. So you’ll probably see on the same chart, I think you’re back on Page 28 or so that we continue to reduce our asset sensitivity. And so we’ve done some things that we talked about at Investor Day, of loan swaps, collars and things like that. So we continue to manage that down. I don’t think we will be at a neutral point, but I think we continue just to work that down.

Okay. Understood. That’s all I had. Thanks for taking my questions.

Thanks, Matthew.

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

Thanks, good morning, everyone. Just one question for me. I think, Glenn, you had mentioned that the – you expect to hold a higher percentage of normalized excess cash kind of going forward. 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 time frame where you think that might have to stay on the balance sheet? Thanks.

Yes. Thanks and good morning. So we are helping right now, elevated cash levels. And I think over the course of the next couple of quarters, we will manage that down to a more normalized level and say that level is about $1 billion as opposed to I think in the quarter, we were $2.2 billion. I think you’ll see that elevated in the second quarter a little bit because that’s – we only closed out the quarter, so we continue to build some cash balances, but we will continue to manage that down for the remainder of the year. And obviously, that has implications from a NIM standpoint, right. And so – because it’s basically doesn’t – it’s not – it doesn’t – it drags – deters from NIM. So, you will see probably a little bit more NIM compression in the third quarter. But then as we deploy that cash and draw it down, that it should – NIM should come back up.

Okay. And this is all contemplated in your guidance the way you just laid?

Yes, it is.

Okay. Thanks. That’s all I had. I appreciate it.

Thanks.

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

Hey guys. Good morning.

Hey Mark.

First question I had, you had about $900 million of commercial real estate growth in the first quarter, was any particular concentrations that came in?

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 Mark is the 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&I and in the sponsor book, the transaction volume is not as high. So, I just throw that in there for context that to get $900 million of growth in 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 as well.

Okay. And then secondly, I am curious if you are 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.

Yes. So, we are modeling at 15 basis points. You probably saw two quarters ago, we did increase the rate. So, it went from like 9 basis points 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 now.

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 the coming quarters?

We actually, Mark, don’t think there will be any financial impact to us – as we said, it’s a third-party vendor that we use for fraud monitoring that experienced the data security incident and had the release of our information. And we have communicated with regulators and clients. None of our systems were impacted, and we believe that there will be no material financial impact to Webster with respect to all aspects of putting that behind us.

Thank you.

Thank you, Mark.

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

Hey. Good morning John and good morning Glenn.

Hey Steve.

Hey Steve.

So, I wanted to start in the aftermath of Silicon Valley Bank. Can you walk us through what happened to your deposit base? John, I thought you said there were inflows and outflows. And I am particularly curious on the Sterling side.

Yes. Interestingly, there was no differentiation really between the two legacy banks, which I hate to say at this juncture into our deal. And so behaviorally, Steve, what we saw across the New Webster was the same across our footprint, which was, as I have 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 the commercial, across all of our relationships and across all of our business lines, we had a handful of large deposit commercial customers, think $200 million, $100 million who either from a pressure from their Board or not-for-profit, they had a Board that pushed on fiduciary duty. And obviously, I am sure you are hearing this from everyone else in those two days or three days that moved a portion of those deposits likely to – where you work, Steve, to JPM or the like. And the interesting points there, Steve, were no one closed accounts. No one drove their balances down to the FDIC insurance limits. They took a $100 million deposit to $50 million or $200 million deposit to $100 million deposit. And the more sophisticated borrowers and the larger corporate borrowers were the ones that kind of acted the most from that fiduciary. We have seen that settle down really, really quickly, and you can see it in our numbers, our commercial deposits were down some quarter-to-quarter. We are seeing some of that flow back. We are also seeing a significant amount of new deposit openings. And I don’t like to attribute it to the two bank failures, but obviously, activities in our footprint, there are people that are reaching out to us. And so we have 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 are on a trajectory where we think we will continue to grow core commercial deposits and no difference across geography or legacy bank.

Okay. That’s helpful. Very helpful, actually. If I could shift to the loan side, so the down shift in loan growth, which is modest, right? You took the ranges down by 2% each, but how much of that is tied to you guys tightening the credit box versus just assuming there will be less demand in the market, just given the economic outlook?

It’s a great question. I talked about this yesterday, Steve. I think there are three implications. Number one, and probably most importantly, to put a fine point on your question, we probably lowered the guidance because of organic lower Fed H8 loan demand. So, the market, there is less loan demand and that’s going to be a driver. Two, 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 are 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 high-single digits to mid-single digits.

Got it. Okay. That’s great. And maybe one last one for Glenn around the margin. So, if the Fed starts cutting rates at some point, I know your outlook is rates flat for the rest of the year, but let’s say they assume start cutting either second half of this year or early next year. How do you think about the delay, the lag in terms of either months or percentage of rate change we need before you could start reducing the cost of interest-bearing deposits?

On the deposits side, so I think – look, I think if you look at our deposit beta, we have lagged like two quarters or so in rate increases. But I think on the way down, as the Fed begins to cut, it’s probably within three months, you would 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.

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

No. I wouldn’t – well, it depends on what you see it in the second half. I mean we are thinking in the first quarter, we see a rate reduction. But so it probably – if it’s in the fourth quarter, you probably wouldn’t see as much, right, because it would be like 30 days or something like that, 60 days before you saw anything. I think what you are 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 interLINK, broker CDs and stuff like that. So, that’s really what’s driving it. And I think if you are thinking about it from a margin standpoint, the – like I have said before, there will be some pressure in Q2 because we are holding all this excess cash, which is the prudent thing to do. But then as we get more clarity on the future in the next couple of quarters, we will manage that down. And so you will see the margin come back up.

Got it. Perfect. Thanks for taking my questions.

Thanks Steve.

[Operator Instructions] Our next question comes from

Hi. This is

Sure. Mostly commercial. So, if you think about our $24 million, $25 million in credit charge-offs in the quarter,

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

So, I think what we purchased that was a little over 6, 13, somewhere around there. And what came off was at about $311 million. So, there is about $200 million that came off and about $900 million that went on. And then in addition to that, we had, as I have said in my prepared remarks, about $400 million in restructuring that we did, so security sales effectively. And those were at – those are at about 60 basis points to 70 basis points.

Prefect. That’s it for me. Thank you.

Thank you.

Thank you.

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

Hey guys. Good morning.

Hey Jared.

Hey. Just looking at the quarter-to-date deposit growth, can you give the composition of where you were 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 Brio and interLINK than I guess you are assuming before?

Yes. So, for the – is your question about from the fourth quarter to the first quarter, Jared?

Well, I guess both, yes. And then what you have seen – what you called out is seeing so far in April?

Yes. So interLINK itself was – for the first quarter was $2.8 billion of the growth. And so we basically – that’s from zero to $2.8 billion. So, that was a big driver. The offset to that was we let some of the brokered deposits run off. So, they went from like $1.4 billion to $672 million, right. And then the other areas where we saw growth, as I have said in my prepared remarks, we are in like certificates of deposits that were up about $1 billion. And those were long dated, a little over 4% retail type of CDs, that’s how we ended the first quarter. As I said in the prepared remarks, we are actually up in the second quarter by another $2.8 billion. And a big piece of that, and I would say about $500 million to $600 million of that is interLINK. Again, and then the remainder is primarily brokered CDs. And our idea with that, and there is some commercial growth, as John indicated, there is continued retail growth, but in being chunks, that’s what it is. And so that we are using to pay down basically some FHLB borrowings and things like that. 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 you think of it that way. And so we wanted to make sure we preserve the optionality of that. And then the other dynamic, as I have said a few times, is that we are managing down cash. And so you would expect to see our FHLB borrowings to come down. The growth in interLINK as we go through the year, brokered deposits will probably flatten out because I think we have other sources of funding that we will get, whether it’s Brio or things like that. So, I think that’s kind of how we are thinking about it.

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

So interLINK is in money market, but I would point you to our slide – the slide presentation because we broke it out there. So, if you look on Page 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 headed in his slide as well, the net difference between interLINK and whatever else is basically wholesale funding.

Okay. And then – and just finally, on interLINK, the cost of that for the quarter, is that similar to FHLB, I guess where we – where is the cost on that…

Yes. It’s like Fed funds – it’s like 5%, Fed funds plus 15%, say.

Okay. Great. Thank you very much.

Sure.

Thank you, Jared.

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

Thanks for the follow-up. Glenn, just on the guide, the expenses and the fees, I mean are you excluding anything in those, now the charges? Just make sure I got the right start point?

Excluding, I am sorry...

In the expenses, the 1.2…

Yes, those are our core operating expenses. So, it doesn’t include merger-related expense or to the extent we have which we shouldn’t have much any other strategic initiatives that we spend.

And same with the fees, that excludes the bond?

Yes. Same thing.

Got it. Alright. Thank you.

Sure.

Thanks Chris.

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

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