Webster Financial Corporation (NYSE:WBS) Q1 2023 Earnings Call Transcript

Thanks.Glenn MacInnes 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.Daniel Tamayo Okay. And this is all contemplated in your guidance the way you just laid?Glenn MacInnes Yes, it is.Daniel Tamayo Okay. Thanks. That’s all I had. I appreciate it.John Ciulla Thanks.Operator Our next question comes from Mark Fitzgibbon from Piper Sandler. Please go ahead. Your line is open.Mark Fitzgibbon Hey guys. Good morning.John Ciulla Hey Mark.Mark Fitzgibbon 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?John Ciulla 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.Mark Fitzgibbon 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.Glenn MacInnes 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.Mark Fitzgibbon 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?John Ciulla 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.Mark Fitzgibbon Thank you.John Ciulla Thank you, Mark.Operator Our next question comes from Steve Alexopoulos from JPMorgan. Please go ahead. Your line is open.Steve Alexopoulos Hey. Good morning John and good morning Glenn.John Ciulla Hey Steve.Glenn MacInnes Hey Steve.Steve Alexopoulos 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.John Ciulla 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.Steve Alexopoulos 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?John Ciulla 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.Steve Alexopoulos 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?Glenn MacInnes 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.Steve Alexopoulos 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?Glenn MacInnes 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.Steve Alexopoulos Got it. Perfect. Thanks for taking my questions.John Ciulla Thanks Steve.Operator [Operator Instructions] Our next question comes from Zach Westerlind from UBS.

Please go ahead. Your line is open.Zach Westerlind Hi. This is Zach on for Brody. My question is just around the 20 basis points of charge-offs. Could you provide any color on what loan categories drove that number?John Ciulla Sure. Mostly commercial. So, if you think about our $24 million, $25 million in credit charge-offs in the quarter, Zach, just to give you some – because we have been talking about this the last several quarters, about $7 million of that were related to strategic loan sales, about $350 million in the quarter. So, obviously, very, very small discount on balance sheet optimization and in proactive credit monitoring. The rest of the $18 million or so were all in about four commercial credits with actually, I think four different business lines with no kind of correlated risk in terms of – or anything that we are seeing with respect to sector or industry or geography.