Good morning, and welcome to the Webster Financial First Quarter 2024 Earnings Call. Please note, this event is being recorded. I’d 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. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue. I'll now turn it over to Webster Financial CEO and Chairman, John Ciulla.

Thanks, Emlen. Good morning and welcome to Webster Financial Corporation's First Quarter 2024 Earnings Call. We appreciate you joining us this morning. I will provide remarks on our high level results and operations before turning it over to Glenn to cover our financial results in greater detail. We're off to a solid start this year, having achieved a number of significant accomplishments, both strategically and financially. I first want to provide some color around initiatives that solidify Webster's commitment to our clients, communities and colleagues, as these have been and continue to be core to our company values. In the fourth quarter, Webster launched the You're Home program, a special purpose credit program offering down payment assistance and flexible credit requirements to help expand homeownership opportunities for low to moderate income first-time homebuyers. The You're Home program is the most recent component of our broad-community investment strategy, a multi-year commitment to expanding access to capital, providing loans, investments, technical assistance and financial services to individuals and small businesses in LMI neighborhoods. We are also launching four new finance labs in the coming weeks, in partnership with local non-profits, the Webster Finance Labs Initiative, provides technology and programming to create financial empowerment opportunities for young people. By the end of this year, we will have deployed over $1.7 million into nine labs under this initiative. Our colleagues share this commitment to service last year, the Webster volunteers gave nearly 17,000 hours of their time to nearly 500 community organizations across our footprint. These are just a few examples of how Webster and our colleagues demonstrate our commitment to our values and our communities. Turning to our financial performance on Slide 2. On an adjusted basis for the quarter, we generated a return on average assets of 1.26% and a return on…

Thanks, John, and good morning, everyone. I will start on Slide 6 with our GAAP and adjusted earnings for the first quarter. We reported GAAP net income to common holders of $212 million with diluted earnings per share of $1.23. On an adjusted basis, we reported net income to common shareholders of $233 million and diluted EPS of $1.35. The largest component of the adjustments was in addition to the estimated FDIC special assessment of $12 million. A one-time tax adjustment of $11 million and $3 million in Ametros closing costs. In addition, a securities repositioning loss was more than offset by an MSR sale. It is notable that there were no sterling-related merger charges this quarter, and this will continue to be the case. Next, I will review the balance sheet trends, beginning on Slide 7. Total assets were $76 billion at period end, up $1.2 billion from the fourth quarter. Our security balances were up $250 million relative to the fourth quarter. The yield on our portfolio increased 29 basis points linked quarter to 3.64%, via the combination of growth, reinvestment of cash flows and $388 million in restructuring executed this quarter. Loans were up $373 million, driven by commercial categories and reflective of opportunities to gain market share. While total deposits were flat, we grew core deposits $1.5 billion and retail CDs $350 million, which was offset by a decline in brokered deposits. As John noted, and you can see on this slide, we have aligned Ametros and HSA Bank for segment presentation purposes, while still providing the same data on HSA Bank that we have historically. The loan-to-deposit ratio was 84% in the range of where we expect to operate over the next few quarters. Borrowings increased $1 billion as we use them for liquidity purposes,…

Thanks, Glenn. To follow up on one point in our outlook, while we have maintained our longer-term 10.5% common equity Tier 1 target, I anticipate we will run it closer to 11% in the near term to medium-term given the increased uncertainty generated by a higher for longer bias. We think we would like to have incremental optionality in our pocket, and that would be prudent. Additionally, given higher capital levels in areas for which we see the greatest opportunities for loan growth for the remainder of the year, we anticipate that commercial real estate relative to our total capital levels should decline. Over the next four quarters to six quarters, our intent is to bring CRE concentration to approximately 250% of Tier 1 capital-plus reserves with a longer-term target closer to 200% as we approach the $100 billion asset size threshold. There are many more industry headwinds and tailwinds, as we work our way through 2024. But I continue to be very confident in our ability to navigate the current landscape, both offensively and defensively. We will prioritize strong capital levels and disciplined credit management. We will continue to take care of our clients and deepen those client relationships across business lines. We have a diverse funding profile and a loan-to-deposit ratio in the mid-80s, providing us with significant flexibility and optionality on the funding side. Finally, our efficient operating model and unique businesses should allow us to continue to provide better than peer returns consistently over time. Finally, as you are all aware, Glenn recently informed me and our Board of Directors of his intent to retire. We've kicked off a comprehensive search for his successor in partnership with Spencer Stuart. There's been broad interest in the role, and we are confident that we will find a terrific person to fill some big shoes. Glenn will in all likelihood be with us for at least the next earnings call, so I'll save my farewell remarks for July. As all of you know, Glenn has been an invaluable asset to me and to the bank for more than a decade, and he has shined over the last five years through a pandemic, a transformational merger and the industry events of last March. Thank you all for joining us today. And Eric, Glenn and I will open the line for questions.

[Operator Instructions] Your first question comes from the line of Matthew Breese with Stephens. Please go ahead.

Hi, good morning everybody. I was hoping to start just on the NIM and NII. If I look at where we are this quarter versus the guide suggests that at some point this year, kind of a material snapback in the overall quarterly cadence of NII. I was hoping you could just help me better understand the rest of the year in terms of NII or where you expect that snapback to occur either on an NII basis or a NIM basis? Thank you.

Yes. So let me start and John you can add some color to that. I mean -- I think we look at it a couple of drivers there, Matt. The first being loans, and we're still guiding towards 5% loan growth. So if you think about on average, you are probably talking about $1.4 billion to $1.5 billion in average loans on a year-over-year basis. And so we will get the benefit of that. Likewise, on the investment portfolio, we will get the full year benefit of the restructuring we did in the fourth quarter and the ad that we did in the fourth quarter of $1.1 billion, as well as the restructuring we did in the first quarter. We continue to see opportunity in the securities portfolio on cash flow basis where we'll have probably about $500 million a quarter that will reprice. We will probably pick up 300 basis points on that. And then likewise, on the fixed rate loan portfolio, although it was somewhat softer in the first quarter, we think that we'll probably get about $800 million a quarter on the fixed rate loan portfolio will probably pick up about 200 basis points on that. So those are the tailwinds. On the opposite side, we continue to see pressure on deposits. And so I think, our deposit costs, as you saw in the first quarter creeped up by 8 basis points, it was more moderate than we have seen in previous quarters. But I think, as you look through the cycle you would expect to see deposit costs continue to peak in the second quarter and third quarter, so that will detract from some of the gains that we get on both the loan growth, the investment and the repricing of fixed rate assets.

Yes, Matt, I mean, I’d just say, obviously, we're trying desperately not to overpromise and underdeliver that's not our style over seven years. The first quarter was interesting in that we had back-ended loan growth. We had very little loan growth in Sponsor & Specialty, we're starting to see some more activity there. So our loan yields were lower. The average loans were lower and some of our expectations of repricing of the portfolio that Glenn mentioned that we had expected in this higher for longer environment didn't occur because we had a much lower level of prepay and refinance and repricing activity in the book. We also had a short-term mix shift in deposits which we think will rebound a bit, and we get the full benefit of HSA and Ametros going forward. So I think if you add what Glenn just gave specifically with respect to opportunities for higher NII from the securities portfolio, the moves we made from a more favorable deposit mix and from standard loan growth, where we see -- there being more contribution from our generally higher yielding loans. That's why we haven't moved that -- besides going to the low-end of the original range we provided that's why we've kind of said we think we're going to be approximately around that $2.4 billion. If dynamics continue to change, wildcard on prepayments and other things obviously will mix up the guidance, but it is our best view right now, quite frankly.

I appreciate all that. And the next one is just on credit. All-in-all, the credit metrics look pretty solid, still with the quarter-over-quarter change was notable. You had mentioned there was nothing specific that was driving everything. But I appreciate if there is any sort of common threads, particularly in the C&I book. And then, John you had mentioned kind of getting to a 200% CRE concentration over time. Does something similar hold through for the reserves, which looks a little light versus your $100 billion bank peers as well?

Yes. I mean there is a whole bunch to unpack there. So I would say, from a credit perspective, you kind of nailed it. If you look at all of the credit metrics, annualized charge-offs in the quarter are really sort of kind of in-line with what you're seeing in the industry, similar to what we had last quarter, the percent increase in classified and non-accruals looked high. But if you look at our absolute numbers, they're still below what Webster Bank reported pre-pandemic at [12, 31, 2019] (ph). So I think you're right to say the absolute levels are still not kind of eye-popping. We are seeing negative risk rating migration. And I think, it's consistent with those who have reported thus far. And I think, as I mentioned in my comments, I think we believe – there will be more pressure, not less pressure on credit, as we work our way through whatever this, I think pretty modest cycle will be. We haven't really seen -- we had a kind of a broad contribution on the classifieds and the non-performers, actually skewing a little bit more towards C&I than CRE. I think, we've been really out in front on CRE. But the only way I can characterize, I would say there's -- the only industry segment that we have seen some negative trending in is health care services. But we think fundamentally that industry and area has really good fundamental dynamics going forward. Otherwise, it's kind of idiosyncratic one-off. So an equipment finance deal, a middle market transaction, a health care services deal, a food and beverage company so really just kind of one-offs and only a handful of loans that actually drove the increase in those categories. So we are not sounding the alarm everywhere. Jason is…

Okay, thanks. I appreciate all the color. I’ll leave it there. Thank you.

Thank you.

Your next question comes from the line of Chris McGratty with Keefe, Bruyette, & Woods. Please go ahead.

Hi good morning. John, a question on normalized charge-offs. You've kind of been in this 25 basis point, 30 basis point range. How do you view this environment in the context of normal?

Yes. I mean, I think in the benign credit environment leading up to the pandemic, I think we were in the 20 basis point range give or take. The last few quarters to be completely transparent. Obviously, we had a decent portion of the charge-offs were related to proactive balance sheet management loan sales. This quarter, the vast majority of the charge-offs were what I would call kind of liquidated charge-offs, they happened. They weren't related to asset sales. So I do think, that there is more pressure on credit. I think anything below 40 basis points in terms of cycle, 40, 50 basis points in commercial, it's still absolutely absorbable by our cash flows and our earnings power. I think what I would tell you right now is we are seeing across the industry, the beginning of what I believe will be a shallow credit correction and the way we look at things going forward, Chris, I still think our provision that -- The Street has for the full year, it's kind of what we're building in, even looking at our risk rating migration, and our classified assets and our non-accruals in the outcomes of the loss given defaults on loans that may be troubled. So this 30 basis points, I’d say, is slightly higher. It doesn't portend to have a huge credit correction. Could it go here in any one quarter. I think you've heard a lot of people say in this earnings cycle. When you have a large commercial loan portfolio, that thing can bounce around a little bit because you really can't control what happens. And if you have a couple of larger charge-offs that could bounce around from that 30 basis points. But I kind of feel like we're in a heightened alert. The ultimate overall metrics still are better than pre-pandemic or around pre-pandemic. And it's a question of whether or not this is deeper. So could you see charge-offs go higher in certain quarters? Yes. Would I be surprised if charge-offs were lower next quarter, I wouldn't be. So I hope that gives you just some color of the way we are thinking.

That's good. Thank you for that. And I guess my follow-up would be, you guys have been early on loan sales, didn't do anything really meaningful this quarter. To get to that CRE targets that you are talking about, is there a scenario where you would accelerate that achievement?

Yeah. I think it's just an economic exercise. We -- we've got some great partnerships. We have some interesting agency eligible loans in our portfolio, depending on the interest rate environment and what happens, there is opportunity to do that without taking significant hits. We are looking at everything. And obviously, we want to make sure that our clients, the ones where we have full relationships know that they are banking with us, and we can continue to support them. With respect to non-strategic loans that may have good market value and easily salable, we obviously have some levers to pull. We could have in this quarter, done that. We just didn't think, the economics made sense because there wasn't poor credit quality, it was just a question of kind of the earnings and the yields on those loans. So I think, my short answer would be yes, as we execute that repositioning and we move forward, and we don't want to [jolt] (ph) the income statement either from having lower earning assets. You will see proactive, selective and opportunistic loan sales as we move forward, particularly if the interest rate environment moderates as we head into 2025.

Great. Thanks John.

Thank you.

Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hi guys good morning. Glenn, let me echo John's congratulations on your well-deserved retirement. Glenn, in your modeling, I guess I'm curious, how different would your full year NII estimate be, if we have no Fed rate cuts this year?

Not really. So we have one cut in September and December right now. And I think, the difference Mark, if I just kept it flat is a total of $4 million. So it's not really relevant.

Okay. Great. And then secondly on the office book, it looks like you've got about $260 million of office loan maturities this year. I guess I'm curious, did the borrowers have anywhere else to go or are you sort of forced to refinance for them? And do you have -- I assume at this point, pretty good line of sight into what's happening with those individual credits. Do you see any problems on the horizon with that book?

Yes. I mean, obviously, it's a book we're looking at significantly. It is the area where you've had the biggest decline in valuation. We give you the stats, Mark that say, we start out from a pretty good loan-to-value perspective, pretty good debt service. You've seen a small migration into classified for us. We have done a really good job of taking the book down from $1.7 billion to $1 billion over the last six quarters or seven quarters. I think, now what we are doing is focusing on kind of how we deal with -- we're dealing with maturities there, the way we're dealing with maturities across the entire CRE book and consistent with what you've heard from others during this reporting cycle. We have had opportunities, we've been able to refi some. There is, I think -- you probably qualify it pretty well that there is not an immediate source of refinancing away from us, quite frankly for most of these loans unless they have unique circumstances. So we had a couple of payoffs, a couple of sales. In most cases where we are doing on the maturities shorter-term extensions. Obviously, you can't -- people will say is the industry kicking the can forward, I guess at some level they are -- but we can't kick the full can forward as an OCC-regulated bank. So what we are doing is making sure that there is debt service in place at market or near market rates. We're making sure that we get kind of bootstrap collateral. We get debt service coverage reserves, we get guarantees for periods of time. So that's basically what we have. I think we have 75% of our loans now have some sort of credit enhancement either through a guarantee or a debt service reserve. And so we are just kind of working our way through that portfolio. And I think we are fortunate that our overall portfolio is relatively small, more than half of it is Class A. It's geographically diverse. It's not all Metro. And so, so far -- and I'm knocking on wood here, we've been able to kind of work with borrowers through it. And despite the precipitous drop in valuation that you are reading about and we see some of that the owners of these properties, most of them feel like they still have equity in the building, and so they're willing to work with us to make sure we have a solid performing secured loan moving forward.

Thank you.

Thanks Mark.

Your next question comes from the line of Steven Alexopoulos with JPMorgan. Please go ahead.

Hi good morning everyone.

Hi Steve.

John, I want to start on the loan outlook. So for the banks that reported this quarter, most CEOs are sounding a bit more optimistic, citing approved pipelines, customer sentiment, et cetera, and you guys are taking the range down to the lower end, not a massive change, but you're pushing to the lower end. What really changed versus last quarter? And are you not also seeing an improvement in pipelines?

Good question. So I think if you look at the first quarter, we had 1.2% loan growth, which is kind of in-line with that 5%. And you're right, first quarter is usually a seasonally low origination quarter and obviously consistent with everyone else, loan demand was sort of muted at the beginning of the year. And then we moved some loans off which we can talk about later with respect to payroll finance and factoring into held-for-sale. I think as we go forward, our Sponsor & Specialty book, Steve, which, as you know, has been kind of a crown jewel of ours and we've seen the beginnings of green shoots and pipeline build there, but it's been slower activity in that sponsor space. And so I think that was one reason. We talked just a second ago with Matt about commercial real estate and the fact that we're going to be a little bit more selective and careful as we move forward in that segment, both with respect to the kind of inherent risks and the optics of our concentration levels there. And what I would say is definitely things getting better. I think the second half could be good. Could we outperform on the 5%? Yes. But as I mentioned earlier, we don't like to overpromise and under-deliver. We were disappointed this quarter by the NII. And I think, we looked at the makeup of our portfolio, went to our business line leaders and thought 5% was the right guide. I'm hoping that we can outperform that. We are seeing better pipelines, we're not seeing as robust pipeline, but I think there's reason to be optimistic for the second half.

Got it. Okay. And then for my follow-up. So on the margin, I know it came in a little bit weaker this quarter, a lot of moving pieces of all-wholesale funding, et cetera. For you, Glenn do you think this is a bottom for the margin this quarter? And how do you think about NIM trending before we get any rate cuts and then maybe if we do get rate cuts? Thanks.

So Steve, I think margin will be relatively flat quarter-over-quarter. Net interest income will improve quarter-over-quarter. But I think the margin where we are right now, [3.35%] (ph) will probably be relatively flat. I do in our forecast and the assumptions that I laid out before, whether it's loan growth or the investment portfolio, the repricing stuff. I do think that our margin will get to like the [3.45%] (ph) ish by the end of the year, somewhere around there. Potential upside, depending on how quick we can reduce deposit costs but that's how we're thinking of it right now. So you can think about a full year average margin somewhere around [3.41%, 3.42%] (ph) -- just look at the full year.

Got it. And I know you said in response to Mark's question, whether cuts happen or not very material. But in a cut scenario given Interlink some of the higher cost deposits you have, do you -- would that benefit the margin incrementally towards the end of the year if we get rate cuts, is that we should think about?

Yes, it would. I mean I think right now, we see deposit costs, like I said, peaking in the second quarter between the second and third quarter and then coming down. A big driver of that, I talked about this on the last call, is of our $60 billion in deposits, about 20% are sort of had the same characteristic of Interlink. So they reprice pretty quickly. So those are things like public funds, those are things like Interlink and there is some other products there. So you can think about $12 billion that I would consider sort of high data products right now, but then they reprice down pretty quickly. So that would be the first tranche to go with the Fed cuts. We think that the deposit beta on the way down is say, 20-plus percent on the way down. So I think -- and that's reflective of like a three month pipeline that the core deposits have to cycle through. And so you will see that when the Fed starts cutting, you will see that our deposit costs come down. The other thing I would point out is we're starting to see the industry pull back a little, and we've reduced -- if I look at our CD rates, for example, we had $2.2 billion come due in the first quarter. That repriced higher by 43 basis points. As I look forward, there's another $2 billion in the second, another $2 billion in the third quarter, those are going to be neutral. By the third quarter it might even be accretive to us because one, we reduced our rate and we've also reduced the term. And so I think that the drag from the CDs repricing will be behind us beginning in the second quarter.

Okay. Got it. Thanks for taking my questions.

Thanks Steve.

Your next question comes from the line of Casey Haire with Jefferies. Please go ahead.

Great. Thanks good morning everyone. I wanted to touch on expenses. So you guys kept the guide, which implies a decent ramp from the current run rate. I know you guys still have to fully run rate Ametros. I'm just wondering if that is conservative or just some color on what's the expense pressure there, if -- for the midpoint of the guide?

Yes. Thanks Casey. I think you are right. We got a full year -- the full quarter of Ametros moving forward. So it just annualized. I think we are keeping -- I guess, to answer your question upfront, it's a conservative number. But it's a conservative number based on the fact that we're building out our program and our work streams to make sure, as we move towards $100 billion that we continue to invest in areas where we think it's important to make sure that we're beefing up our control functions and compliance and others. We're also continuing to invest in treasury payment capabilities, digital channels to make sure that we're giving our clients all of the experiences that they deserve. We've talked often about the fact that we are starting from a mid-40s efficiency ratio, a full 10% lower than most of our peers. And I think a lot of folks will need to continue to invest, particularly the ones in the $50 billion to $100 billion category. And we think that low starting point of efficiency gives us some flexibility. Do we have opportunities to either switch up timing of expenses? We do. Do we have opportunities to continue to look at the makeup of our business. We talked intensively over eight quarters about while we liked all of the various business lines we had that there were some that had maybe were too small to really help us, and we would reposition capital. And you saw us do that with mortgage warehouse and you saw what Glenn talked about moving the payroll finance and factoring balances to held-for-sale and us moving away from that business. We do have other opportunities to continue to refine our business and reallocate capital that would also give us some relief on cost pressures. So I think it's a realistic number given our plan as we move forward. I would say, it's conservative in that we do have levers to pull should the top line not play out the way we think it will.

Got it. Thanks. And then just wanted to circle back on the loan growth. So if I'm understanding you correctly, CRE is kind of run in place. The loan pipeline is sounds okay. But CRE drove a ton of growth this quarter, it's 42% of the loans. So that means to hit 5% for the rest of the year. The rest of the portfolio is going to have to average high single-digit pace of growth. It just doesn't seem like that the pipeline supports that. And just some color there on what buckets you're looking to grow to pick up the slack for CRE.

Yes, fair question, Casey. So obviously, as you know, in these businesses, it is an aircraft carrier, right? So you'll probably see healthy CRE originations in 2Q as well as we sort of work through the pipeline, and we continue to kind of position ourselves and that's why we said kind of over the next six quarters, you'd see that change in the balance sheet. So I don't think you'll see a complete hole, if you will from a commercial real estate perspective. We do have increasing activity in our Sponsor & Specialty business, which has been historically a high growth 10% CAGR growth business over time and you are starting to read about more private equity activity and we're starting to see people gear up. We have fund banking, which is a lever we can pull and that we are really doing well there from a strategic perspective, not only growing high quality, nice yielding assets, but getting deposits and other elements there. We have a pipeline in the middle market. We've got our ABL and equipment finance businesses and so we've got, I think enough levers to pull that when we sit there and look at the profile. We think that to the extent CRE slows in the second half of the year, that we have plenty of levers to pull. You've heard me say over and over again, in a normalized environment, we are a 10% commercial growth, and we've done it over eight years consistently from a CAGR perspective. This is a unique environment. We've seen fits and starts in overall loan demand. And now we are layering on top of that kind of a desire to mute CRE growth compared to the rest but as you said, that high single-digit loan growth in the other categories doesn't scare us a ton as long as the market cooperates. And by the way, you know that we're risk managers first, right? We really feel good about this bank. We're a bank that has -- even with the NIM compression, but really helping NIM at 3.35%. We've got a 45% efficiency ratio, a 1.25% ROA and a 18% ROE. And so we are going to make sure that we're making the right short-term moves even if it means there is a quarter where we fall short. And I think our long-term growth targets and objectives are completely attainable. So our plan -- we're not being blind, Casey, going into saying, hey, we're going to freeze CRE and we're going to still have 5% loan growth. I think, you're going to see CRE kind of taper with respect to its growth trajectory, and we feel pretty confident about the other asset classes and our ability to grow those loans.

Great. Thank you.

Thank you.

Your next question comes from the line of Jared Shaw with Barclays. Please go ahead.

Hi, good morning. Maybe just switching over to deposits with DDA balances declining this quarter. Do you think that we're near the bottom here? Or is there still some more diminishment you expect out of the base? And where do you think deposit growth comes from to hit those targets going forward?

Yes. So let me – hi Jared, it's Glenn. So I think -- we did see an acceleration in the first quarter of customers sweeping excess cash into money market deposit accounts. But we do -- if I look at my forecast, my forecast is basically flattened that out. So I think, I would think of the second quarter, a $10.5 billion on DDA that's basically flattened out for the year. As far as growth, the drivers and the guidance suggests $3 billion to $4 billion in deposit growth at the low and the high range. So some of the key drivers are going to be in Ametros, obviously, say, $100 million on the low end, $150 million on a high end. HSA between $200 million and $500 million over -- on the course of the year. Interlink, I'd probably say, about $1.4 billion will grow between now and the end of the year. We still continue to see CD growth. We saw $300 million in the quarter. I think for the full year, we are thinking it is probably about $500 million. And then the rest of that would be probably in wholesale funding or the wholesale channels.

Okay. That is good color. Thanks. And then -- could you just give a little more color on the credit valuation moves that we saw this quarter and what drove that? And how you guys could try to plan that going forward?

Yes. So that's driven by -- primarily by rates that you saw the reduction last quarter as rates from the third to the fourth quarter came down and then you see it from the fourth quarter to first quarter, sort of a snapback on that. So that's -- it's pretty much driven by rates. These are -- this is the valuation part of our customer derivative book, right? And so there is been some noise back and forth over the last couple of quarters. It's hard to forecast, you can tie it to rates. And I would say, if rates are stable right now, you'd probably expect it be relatively stable. As rates go down, it could -- we could have a little bit of a hit, but nothing like we saw from the third to the fourth quarter where it was $4.3 million from [memory] (ph).

Okay. Great. And congratulations on the retirement, looking forward to still talking to you over the next quarter or so.

Thanks Jared.

Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

Hi, good morning. Given the comments on capital and eventually moving that CRE to Tier 1 plus reserve number lower than even 250%. Does that mean that buybacks are off the table for the foreseeable future? Or do you think you could restart once you get to that 11% CET1 level. And as we think about that 11% level as well, should we think about that as a more permanent target now given that you want to eventually get to that 200% number? Or is it just a function of moving up reserves, slowing the CRE loan growth, and then you can bring that CET1 number back down to $10.5 million?

Yes. I think, for the foreseeable future, 11% is the target, just given the overall dynamics of us and the marketplace and some of the uncertainty from a credit perspective. So I think, we're unlikely to buy back shares during 2024 unless there is some other specific change. We generate a lot of capital every year, given our profitability metrics. So I do think, as we did from the closing of the MOE 2.5 years ago or just over two years ago for that 11% level and we are moving forward and we're generating capital, and we don't have a good internal use of that capital, we will return it to shareholders in the form of dividends or more likely buyback given the fact that we feel comfortable with our dividend level. So I think, you could see that restart as we get into 2025 and as our capital level gets to 11%. So -- that's kind of our view right now. Obviously, we've talked that from M&A perspective, we're not really focused at all on inorganic growth right now. We would love to do more transactions like the Ametros transactions, which brings low-cost deposits and fees. But right now, our focus is on working through generating and delivering on our guidance, taking care of our customers, making sure we work through credit building capital back up to 11% and then we'll be back to our normal kind of capital management plan in 2025.

Very helpful. And then thanks for the detail on the rent-regulated multi-family exposure. I see that most balances were originated post-2019. But can you talk about your comfort level with the credits and the level of reserving for the 35% or so that was originated pre-2019? And are there any details that you can share on that portfolio?

Yes. Those are really small -- generally, as we said, granular small balance accounts averaged $3.5 million in exposure. We are seeing kind of -- the metrics we actually did a deep dive and try to look at the credit metrics, the performance, the debt service and the LTV comparatively between the ones that were underwritten before and after, and we are not seeing any differentiation in performance. So the entirety of the book is kind of performing with very low levels of classified and criticized assets. I think one of the key points to make, not only on our rent-regulated multi-family but on our multifamily book in general is that we underwrite to in-place market rents. So we are not counting on there being rent increases at the end of the day to ultimately service the debt and that has set us well. It doesn't mean that higher -- I mean, higher operating costs can't impact NOI, but we haven't seen any degradation in the portfolio. So we are looking right now at a similar portfolio construct and performance between pre and post-2019 underwrites.

Got it. And no major degradation in LTVs there either?

No, we haven’t seen it.

Okay, thank you.

Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Thank you. Good morning guys. Maybe first just changing gears here, looking at the fee income guide. Just curious if there is something in the $97.5 million core number that you did in the first quarter that you expect to moderate? Or do you think that's a decent number to grow off of in 2024?

Yes. So I think on that, we were -- I think, we still feel good, like I said in the guidance, the $375 million to $400 million. We did have a strong quarter. I think the guidance implies a range of $92 million to $100 million. And some of the tailwinds, if I just sort of break it out, we still will get the benefit -- the full year benefit of Ametros, which will add a $1.5 million to $2 million beginning in the second quarter. And then we'll see increases in loan-related fees, deposit servicing fees and stuff like that throughout the year. Some of the headwinds that we'll see are – we will see probably lower HSA interchange, which sort of peaks in the first quarter. But I think, all-in-all, we still feel good about the guide. And I would expect that you would expect that it would be in the $98 million, $99 million range.

Okay. Great, Glenn. Understood. And then maybe just a follow-up on the conversation on deposits. You mentioned you're budgeting for non-interest bearing to stay relatively flat for the rest of the year. If that were not to be the case, if we did see some kind of decline in those balances as the year progressed. How would you expect to go out and would you go out and fill a void with additional funding via wholesale channels? Or would you -- just curious how you would approach that scenario. And if there is a kind of some kind of leverage in the market.

Yes. From a funding gap, the answer is yes. I mean depending on your loan growth. Probably you get some additional mix. And you'd probably see a move -- as we've seen in the past, like money market deposits. So it definitely increases your cost. The other thing I'll point out, John, is that with Ametros and HSA, Ametros is at 7 basis points or 8 basis points. And we've come out of the box -- they've come out of the box pretty strong on that. We closed at $800 million. We're already at $871 million and it's just basically two months. And so we expect -- we think that's going to grow pretty good as well. And likewise, with HSA. So I think, there is a lot of -- as John pointed out in the opening comments, when you look at our diverse funding profile, there's a lot of levers we can pull. Short answer is if we saw some more pressure on DDA, we probably use wholesale funding. The last thing I'd put on Ametros, by the way, and it is in this slide is that in that business, we have about $3.5 billion of committed funds in the future. So those are contractual settlements. So if you think of that business, there is $3.5 billion in a pipeline that's over years and years, but it's -- that's the committed funds to that business. And I think that represents a pretty significant opportunity for us.

Yes. And I would just -- again, I think I'm probably saying the same thing Glenn said. But what we saw in the first quarter was less DDAs out creating funding holes, but DDAs to higher-yielding accounts internally. So we didn't really -- it didn't create a funding [hole] (ph), it was just unfortunately higher cost deposits.

Okay, great. Thanks for all the color. Appreciate again.

Your next question comes from the line of Bernie von-Gizycki with Deutsche Bank. Please go ahead.

Hi guys good morning. John in the beginning of the call, you noted you expect an ROA of 1.3% and a ROATCE of 18% in 2024 and beyond. It's similar to the adjusted results this quarter -- is that how we should also think about this as a through-the-cycle return target? And if you can elaborate on any underlying macro assumptions behind that?

Yes. I mean I think if you just take kind of where our guidance is right now, kind of that's the output, right? And the reason we talk about those return metrics is that when we announced the merger with Sterling three years ago, we thought that structurally, this is what this company can generate with respect to returns. And interestingly, nothing in our original assumptions about the macro environment when we did the deal has come true. We've seen a precipitous change in Fed funds unprecedented. We've seen banking crises, we have seen pressures on liquidity. We've seen outflows of deposits. And through that all, we have continued to post those kind of high teens, ROATCE and kind of a 1.2% to 1.4% ROA. Obviously, this quarter, it was down a little But if we look at our modeling and we sensitize to credit performance, given our efficient operating model and our funding sources like those are our targets. And we've been able to post those targets for the last nine quarters since the merger closed. And those remain our targets. And what could hurt that would be things like a more significant credit crisis, something unexpected in deposit prices and other inflows and outflows. But if you look at our modeling and you look at our history, we think that kind of we're geared up to be able to deliver those returns through cycles.

Okay. Great. Thank you for that. And just separately, I appreciate the additional CRE slides in the deck this quarter in your latest 10-Q, I believe you disclosed the CRE office reserves of nearly $36 million. Just wondering how is that tracking as of 3/31?

We disclosed it -- those reserves have moved up their 5% of the traditional office portfolio now. I think last quarter, they were 3.5%. Anybody there?

Your next question comes from the line of Laurie Hunsicker with Seaport. Please go ahead.

Yeah, hi thanks. Good morning, and Glenn, I just wanted to say congrats. Just if we could jump back to C&I, that's where you had a big jump in non-performers, can you help us think about going from $135 million to $204 million in non-performers in the quarter. Where we are seeing that jump where any details? Is it Sponsor & Specialty finance? Is it ABL? How much is [next] (ph)? Any color you can share with us there? Thanks.

Yes. Laurie, I will try. We -- at a company our size, we certainly don’t talk about specific credits, but there were, say, four credits in the C&I. We had a contractor, health care services, food and restaurant company, one retail CRE. That's sort of the representation across it. Again, I think I try and look at the macro picture. Obviously, Jason is looking at the micro picture to see whether there is any correlated risk So if I told you they were five sponsor deals in a particular segment, I would be transparent and tell you that and say we are concerned about it and give you more portfolio detail but these were really idiosyncratic across five different categories across our C&I and one CRE deal. And again, I think, the critical element is that our non-accrual loans, if you look at peers that have reported so far or you look at Webster's nonaccrual levels pre-pandemic, we still have an approach the benign credit environment level there. And I'm not pretending that we won't because I said we'll continue to have pressure. But nothing we've seen has suggested that there's a pocket of weakness for underwriting, asset class business-line or geography that has us particularly concerned, we're really reviewing the whole portfolio. So I would say, it's idiosyncratic across industries, across sectors and business lines in the quarter and a move back to a more normal level of non-performers.

Got it. And then just especially the Sponsor & Specialty book, how much is that non-performing?

Can you repeat the question?

Yes, the Sponsor & Specialty book, what is the nonperforming rate there or dollar amount there, the $6.7 billion book?

About 2% -- about 2%.

Okay. Okay. Great. And then just going back to margin here. Do you have the spot margin? And then can you just comment a little bit in terms of FHLB borrowings. I was thinking that the Ametros acquisition, you would probably be paying that down, that's costing 5.5%. Can you just share with us, I guess what you're thinking there? Thank you very much.

So the spot NIM at the end of the quarter was exactly where we were for the full quarter, so say, [3.35%] (ph) spot deposit costs I said on the call, [2.24%] (ph), so up 1 basis point from where we were for the quarter and loans down 2 basis points, so [$622 million] (ph). And then with respect to FHLB, I mean part of the dynamic there, Laurie, is that we've paid down or we've let expire brokered CDs. And so the FHLB borrowings allow us to be a little more flexible than winding up brokered CDs, the terms and stuff like that. And so we can tap that resource in order to fund any shortfalls and things like that. So I think that's the way I would think about it.

At this time, there are no further questions. I would like to turn the call back over to John Ciulla for closing remarks. Please go ahead.

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

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect your lines.