Webster Financial Corporation (NYSE:WBS) Q1 2024 Earnings Call Transcript

Webster Financial Corporation (NYSE:WBS) Q1 2024 Earnings Call Transcript April 23, 2024

Webster Financial Corporation misses on earnings expectations. Reported EPS is $1.35 EPS, expectations were $1.41. Webster Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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.

Emlen Harmon: 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.

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 tangible common equity of 17.9%. Our adjusted EPS was $1.35. We’re pleased to grow client deposits by $1.8 billion and use those funds to redeem brokered deposits. Amidst, a challenging growth environment for the industry, we grew loans at 0.7% or 1.2%, when adjusting for the transfer of $240 million of loans to held-for-sale. Our $1.6 billion in funded loan originations this quarter were driven by high-quality C&I, CRE categories including fund banking and public sector finance, and CRE in property types with solid operating dynamics.

Our efficiency ratio was 45% in-line with the low to mid 40s range, we expect to operate in for the year. Our interest income performance was softer than originally anticipated as a number of factors led to lower than expected loan yields, and we saw our deposits continue to reprice higher, albeit at a moderated rate. Despite these dynamics, we still anticipate that NII for the full-year, will be in the lower range of the guidance we provided in January, assuming loan demand and credit quality of that loan demand cooperate. Structurally and longer-term, we should continue to generate returns near the top of our peer group, given the strategic advantage provided by our funding profile and business mix and the operating flexibility we have created in terms of our liquidity and capital positions.

We anticipate the ability to generate a return on assets in the range of 1.3% and a return on tangible common equity in excess of 18% for the full year 2024 and beyond. Our recently closed acquisition of Ametros, augments our competitive position. On the next slide, we’ve provided the overview of Ametros as a reminder of the business fundamentals now that they are officially a subsidiary of Webster. Ametros is a particularly unique and exciting opportunity as the company provides a valuable service for its members and provides Webster with low-cost, fast growing deposits that add significant fee income. To describe the business in brief, Ametros administers recipients funds for medical claims settlements via a proprietary technology platform and service teams.

Ametros is already illustrating its growth potential, as it has grown to $870 million in deposit balances relative to $805 million in deposit balances, when we announced the acquisition in December. It is our expectation Ametros will grow deposits at 25% CAGR over the next five years before considering potential benefits from expanding — existing partnerships, new market penetration or medical cost inflation. Slide 4, which many of you are familiar with now, highlights our funding diversity and now officially incorporates Ametros. As you will see on subsequent slides, we’ve combined Ametros with HSA Bank in a segment we’ve named Healthcare Financial Services, with the segment reporting to our talented President and COO, Luis Massiani for the foreseeable future, we will continue to provide business specific performance measures for both Ametros and HSA Bank.

Before turning it over to Glenn, let me touch on overall credit and more specifically, CRE. Consistent with industry trends, we have seen negative risk rating migration and a return to pre-pandemic credit metrics. We continue to proactively monitor our overall loan portfolio, and we complete deep dives on targeted segments frequently. While trend lines point to continued pressure on credit performance, excluding office, we haven’t seen any concentrated or correlated problem areas with respect to any particular geography, industry sector or product type. On Slide 5, we provide incremental information on our commercial real estate portfolio, as it continues to be a focal point of investors in a higher for longer interest rate environment. Our commercial real estate portfolio is diversified by geography and product-type, is conservatively underwritten and has continued to perform well from an asset quality perspective.

In its entirety, our commercial real estate portfolio has a weighted average origination LTV of 56% and an amortizing debt service coverage ratio of 1.5 times. Classified loans are 1.5% of the portfolio with non-accruals of just 10 basis points. As rent-regulated multifamily lending has been in focus this quarter, we provided some of the attributes of our portfolio on this slide as well. As you can see in the incremental detail provided here, our modestly sized portfolio is granular was underwritten a conservative LTVs and debt service coverage ratios, and adds limited maturities in the next two years. Additionally, a majority of the book was underwritten following the Housing Stability Act passed in 2019. Therefore, our expectations for the performance of those properties incorporates the unfavorable effects of this legislation on property cash flows.

In this category, the average loan size is $3.5 million. We have only seven exposures greater than $15 million, and our largest rent-regulated multifamily loan is now $49 million. Given the underwriting of the loans and client selection, the credit performance of this portfolio has been solid, as illustrated by just 10 basis points in classified loans and non-accrual. We have also refreshed statistics on our office exposure on this page, where I will point out that we continue to reduce the size of our portfolio. We are actively working the portfolio, given sector pressures, I would note that our New York City office exposure is a manageable $217 million. In addition to the information here, there are two additional slides at the front of the supplement to this presentation that provides significant detail on our overall CRE portfolio, highlighting the diversity of the portfolio in terms of property type and geography.

Importantly, we have been disciplined in terms of hold levels over time, as there are relatively few tall trees in terms of single-point exposures across our various portfolios. Our larger exposures have a stronger weighted average risk rating, as you would expect, and we currently have no classified exposures in the greater than $50 million CRE category. With that, I’ll turn it over to Glenn to cover our financials in more detail.

Glenn MacInnes: 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, given the managed decline in brokered deposits. Capital levels remain strong. The common equity Tier 1 ratio was 10.5%, and our tangible common equity ratio was 7.15% both lower than prior quarter, primarily as a result of the Ametros acquisition. Tangible book value decreased to $30.22 per common share, reflecting the impact of the Ametros acquisition, and a small increase in AFS security losses. In a steady interest rate environment, we anticipate $100 million of unrealized security losses would accrete back into the capital annually. Loan trends are highlighted on Slide 8.

In total, loans were up roughly $373 million or 0.7% on a linked quarter basis. We reclassified $240 million of payroll finance and factoring loans to held-for-sale. We expect to execute on the sale in the near future. Without the reclassification, loan growth would have been closer to 1.2% linked quarter or approximately 5% annually. Growth was driven by commercial real estate, where we had the opportunities to add new relationships and lower risk asset classes, including $275 million in multi-family and $424 million in general commercial real estate categories. The yield on [loan] (ph) portfolio was flat relative to the prior quarter as a result of a shift in mix offsetting higher loan origination yields. Floating and periodic loans were 59% of total loans at quarter end.

We provide additional detail on deposits on Slide 9. We grew our core deposits $1.5 billion and retail CDs $350 million this quarter. Given the strength of our core deposit growth, we reduced brokered deposits. The net effect was effectively flat total deposits on a linked quarter basis. When combined, transactional and low-cost, long-duration health care financial services deposits compromise 46% of our deposit base. Our DDA balances were down $520 million relative to the prior quarter. Two-thirds of the decline was driven by clients moving excess cash balances to higher-yielding money market accounts, with the other third related to specific client transaction activity. Our total cost of deposits was up just 8 basis points to 223 basis points this quarter, as the pace of deposit repricing continues to slow.

For the month of March, our deposit cost was 224 basis points. Increases were the results of clients opting for higher-yielding products, as well as renewals in the CD portfolio. Our cumulative cycle-to-date total deposit beta is now 41%. On Slide 10, we rolled forward our deposit beta assumptions to incorporate the second quarter, during which we expect our cycle-to-date beta to reach 42%, as a result of lag repricing impact and a continued higher rate environment. Moving to Slide 11. We highlight our reported to adjusted income statement compared to our adjusted earnings for the prior period. Overall adjusted net income was down $18 million relative to the prior quarter. Net interest income was down $3 million from prior quarter. This was a result of higher funding costs and lower day count, partially offset by higher earning asset yields.

Adjusted non-interest income was up $17 million. Adjusted expenses were up $22 million, and the provision increased $9.5 million. Excluding adjustments, our tax rate was 20.7% this quarter up from 19.5% in the fourth quarter. Our efficiency ratio was 45%. On Slide 12, we highlight net interest income, which declined $3 million or 0.6% linked quarter. The decline was related to lower net interest margin and day count. The net interest margin was down 7 basis points to 335 basis points, as a result of increased funding costs, which were partially offset by higher asset yields. Interest rate hedges also contributed modestly to the decline. We recognized $11 million in cost this quarter versus $9 million last quarter. As John highlighted, NIM was below our expectations as the macro environment made it challenging to grow higher spread assets that meet our risk criteria.

Our yield on earning assets increased 5 basis points over the prior quarter, with loan yields flat and securities portfolio up 29 basis points. As previously noted, we repositioned $388 million of securities in the first quarter. This will improve our securities yield by 4 basis points in the second quarter. Pace of deposit repricing continues to moderate and was up just 8 basis points. Total liability costs were up 11 basis points. We have provided detail on our hedging program on Slide 27 in the supplement of this presentation, which reviews the bank’s asset sensitivity. On Slide 13, we highlight non-interest income, which was up $17 million versus prior quarter on an adjusted basis. $11 million of the increase was driven by our Healthcare Financial Services segment with $6 million driven by the seasonal increases in growth in HSA Bank and $5 million due to the addition of Ametros.

An additional $5 million of the increase was attributed to a non-cash swing in the credit valuation adjustment. The remaining drivers were related to BOLI events, commercial loan and other deposit fees. Non-interest expense is on Slide 14. We reported adjusted expenses of $321 million, up $22 million from the prior quarter. $10 million of the increase came from healthcare financial services with $7 million driven by Ametros operating expense and intangibles and $3 million due to seasonality and account growth at HSA Bank. Remaining growth and expenses were related to seasonal increases in [payroll] (ph) tax and benefit costs, annual merit and performance-based incentives. Slide 15 details components of our allowance for credit losses, which was up relative to prior quarter.

After recording $37 million in net charge-offs, we incurred a $43 million loan provision, of which $38 million was attributable to macro and credit factors and $5 million of which was attributable to loan growth. As a result, our allowance coverage to loans increased to 126 basis points from 125 basis points last quarter. Slide 16 highlights our key asset quality metrics. On the upper left, non-performing assets increased $70 million relative to prior quarter with non-performing loans now representing 56 basis points of total loans. Commercial classified loans as a percent of commercial loans increased to 224 basis points from 182 basis points, as classified loans increased by $183 million on an absolute basis. Classified loan increase was concentrated in C&I portfolio across diverse industries.

Our classified loan ratio remained well below Webster’s pre-pandemic level. Net charge-offs on the upper right totaled $37 million or 29 basis points of average loans on an annualized basis, consistent with last quarter’s level. On Slide 17, we maintained strong capital levels. All capital levels remain at or above our internal targets. Our common equity Tier 1 ratio was 10.5% and our tangible common equity ratio was 7.2%. Our tangible book value was $30.22 a share. I will wrap up my comments on Slide 18 with our outlook for 2024. The outlook includes the impact of Ametros, which closed in January and directly impacts deposits, interest income, fees and expenses. We expect loans to grow around 5% for the full year towards the lower end of our prior guide.

Growth will continue to be driven by our commercial business with more of a tilt to C&I relative to CRE categories. We are reiterating our deposit growth in the 5% to 7% range, with growth in the commercial bank, full relationship deposits, retail deposits, Interlink, Ametros and corporate deposits. We expect net interest income of roughly $2.4 billion on a non-FTE basis, which is at the low end of our prior guide. For those modeling net interest income on an FTE basis, I’d add roughly $65 million through the outlook. Our net interest income assumes two decreases to the Fed funds rate, with one in September and the other in December. Non-interest income continues to be forecasted in the range of $375 million to $400 million. Adjusted expenses continue to be in the range of $1.3 billion to $1.325 billion.

Our efficiency ratio is expected to be in the low to mid 40% range. We expect an effective tax rate of 21%. And of course, we will remain prudent managers of capital, our long-term Common equity Tier 1 ratio remains at 10.5%. With that, I will turn it over back to John for closing remarks.

John Ciulla: 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.

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Q&A Session

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

Matt Breese: 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.

Glenn MacInnes: 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.

John Ciulla: 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.

Matt Breese: 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?

John Ciulla: 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 doing a terrific job of doing deep dive. So I really kind of just think it is a broad deterioration consistent with — we’ve seen throughout the industry. With respect to the CRE concentration, I think your calculation, Matt what you do, you have us in the [280, 285] (ph) range or something. If we keep that portfolio generally flat, and we do have some payoffs and some roll-offs coming up as we move forward, still giving us an opportunity to originate healthy, really good structured commercial real estate loans, which, by the way we are making the best loans we’ve made now in non-office and rent-regulated multifamily because there aren’t as many market participants. So we’re getting better yields and better structure. But if you see us accrete capital back that we lost in the Ametros acquisition, and you see us managing that, the six quarter $250 million target is not significantly difficult to imagine while we are growing the balance sheet.

I do think over time, the reality is over the next three years, as we start to approach category four, we’ll have to continue to have commercial real estate be less of a concentration overall. I do think, over time, looking at capital levels, a combination of capital levels and reserves those things will probably tick up. I think we can do that in an orderly fashion. Given the makeup of our balance sheet, we don’t have a lot of consumer unsecured, we don’t have cards. So it’s not just the fact that we are in this new category, I think it’s also the makeup of the balance sheet. So I think going forward, it’s not going to be a significant drag on earnings, but you’ll probably see us evolve from a capital and reserve perspective, as we move forward depending on the makeup of the balance sheet.

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

John Ciulla: Thank you.

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

Chris McGratty: 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?

John Ciulla: 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.

Chris McGratty: 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?

John Ciulla: 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.

Chris McGratty: Great. Thanks John.

John Ciulla: Thank you.

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

Mark Fitzgibbon: 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?

Glenn MacInnes: 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.

Mark Fitzgibbon: 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?

Glenn MacInnes: 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.

Mark Fitzgibbon: Thank you.

John Ciulla: Thanks Mark.

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

Steven Alexopoulos: Hi good morning everyone.

John Ciulla : Hi Steve.

Steven Alexopoulos: 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?

John Ciulla: 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.