Webster Financial Corp
NYSE:WBS
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Webster Financial Corp
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Good morning, and welcome to the Webster Financial First Quarter 2024 Earnings Call. Please note, this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlen Harmon to introduce the call. Mr. Harmon, please go ahead.
Good morning. Before we begin our remarks, I want to remind you that the comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rules. Please review the forward-looking disclaimer and savor 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'll 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 [indiscernible] 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 [ Euro Home ] program is the most recent component of our broad community investment strategy, a multiyear commitment to expanding access to capital, providing loans, investments, technical assistance and financial services to individuals and small businesses in LMI neighborhoods. We're also launching 4 new finance labs in the coming weeks in partnership with local nonprofits, 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 9 labs under this initiative. Our colleagues share this commitment to service last year to 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 are 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 [indiscernible]. Our $1.6 billion in funded [indiscernible] 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 on 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 [indiscernible] equity in excess of 18% for the full year '24 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 5 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 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 1.5x. Classified loans are 1.5% of the portfolio with nonaccruals 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 add limited maturities in the next 2 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 ] $3.5 million. We have only 7 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 nonaccrual.
We've also refreshed statistics on our office exposure on this page, where I'll point out that we continue to reduce the size of our portfolio. We're 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 2 additional slides in 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 at 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.
Thanks, John, and good morning, everyone. I'll 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 onetime 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'll 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 broker 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 multifamily and $424 million in general commercial real estate categories.
The yield on the 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 ] 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. 2/3 of the decline was driven by clients moving excess cash balances to higher-yielding money market accounts, with the other 1/3 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 noninterest 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 noninterest 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 noncash swing in the credit valuation adjustment. The remaining drivers were related to BOLI events, commercial loan and other deposit fees.
Noninterest 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 accounted at HSA Bank. Remaining growth and expenses were related to seasonal increases in favorable 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 watch, $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, nonperforming assets increased $70 million relative to prior quarter with nonperforming 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'll 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.
Growth in the commercial bank for 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 would add roughly $65 million through the outlook. Our net interest income assumes 2 decreases to the Fed funds rate, with one in September and the other in December. Noninterest 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'll turn it over back to John for closing remarks.
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'll 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'd 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 4 to 6 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'll prioritize strong capital levels and disciplined credit management. We'll 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're 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 Stewart.
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 5 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.
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?
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're probably talking about $1.4 billion to $1.5 billion in average loans on a year-over-year basis. And so we'll get the benefit of that. Likewise, on the investment portfolio, we'll 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 a cash flow basis where we'll have probably about $500 million a quarter that will reprice. We'll 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've 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 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 would just say, obviously, we're trying desperately not to overpromise and underdeliver. That's not our style over 7 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's 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's any sort of comment trade, 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's 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 nonaccruals looked high. But if you look at our absolute numbers, they're still below what Webster Bank reported pre-pandemic at 12/31/2019. 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'll 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 nonperformers, 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're not sounding the alarm everywhere. Jason is doing a terrific job of doing deep dive. So I really kind of just think it's a broad deterioration consistent with what your -- 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 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're 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 6 quarter $250 million target is not significantly difficult to imagine while we're growing the balance sheet.
I do think over time, the reality is over the next 3 years as we start to approach category 4, 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're 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.
Your next question comes from the line of Chris McGratty with Keefe, Bruyette, & Woods.
John, a question on normalized charge-offs. You've kind of been in this 25, 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's 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're 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 nonaccruals in the outcomes of the loss given defaults on loans that may be troubled.
So this 30 basis points, I would 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're thinking.
That's good. 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're talking about, is there a scenario where you would accelerate that achievement?
Yes. 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's opportunity to do that without taking significant hits. We're looking at everything. And obviously, we want to make sure that our clients, the ones where we have full relationships know that they're banking with us, and we can continue to support them. With respect to nonstrategic 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 do 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.
Next question comes from the line of Mark Fitzgibbon with Piper Sandler.
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's 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've done a really good job of taking the book down from $1.7 billion to $1 billion over the last 6 or 7 quarters. I think now what we're 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've had opportunities. We've been able to refi some.
There is, I think you probably qualify it pretty well that there's 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're 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're doing is making sure that there's 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're just kind of working our way through that portfolio. And I think we're 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're 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.
Your next question comes from the line of Steven Alexopoulos with JPMorgan.
I want to start on the loan outlook. So for the banks that reported this quarter, most CEOs are sounding a bit more optimistic, signing 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 and specialty book, see, 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 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're 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?
So I think -- 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, 335 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 345-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 341%, 342% -- 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 -- 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's some other products there. So you can think about $12 billion that I would consider sort of [ 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 3-month pipeline that the core deposits have to cycle through. And so you will see that when the Fed starts cutting, you will see the 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.
Your next question comes from the line of Casey Haire with Jefferies.
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're right. We got a full year of the full quarter of Ametros moving forward. So it just annualized. I think we're 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're 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 8 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. 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's 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 6 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 and specialty business, which has been historically a high-growth 10% CAGR growth business over time and you're 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're 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're a 10% commercial growth, and we've done it over 8 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 [ 335 ]. We've got a 45% efficiency ratio, a 1.25% ROA and a 18% ROE. And so we're going to make sure that we're making the right short-term moves even if it means there's 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.
Your next question comes from the line of Jared Shaw with Barclays.
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 -- 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're thinking it's probably about $500 million and then the rest of that would be probably in wholesale funding or the wholesale channels.
Okay. That's good color. 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's 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 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 for memory. .
Great. And congratulations on the retirement, looking forward to still talking to you over the next quarter or so.
Your next question comes from the line of Manan Gosalia with Morgan Stanley.
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's 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 2 years ago for that 11% level and we're 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 multifamily 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 fonts accounts averaged $3.5 million in exposure. We're 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're 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 multifamily but on our multifamily book in general is that we underwrite to in-place market rents.
So we're 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're 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.
Your next question comes from the line of Daniel Tamayo with Raymond James.
Maybe first, just changing gears here, looking at the fee income guide. Just curious if there's 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'll 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. Understood. And then maybe just a follow-up on the conversation on deposits. You mentioned you're budgeting for noninterest-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's a kind of some kind of leverage in the market.
Yes. From a funding gap, the answer is yes. I mean depending on new 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 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 age 71 and it's just basically 2 months. And so we expect -- we think that's going to grow pretty good as well. And likewise, with HSA.
So I think there's 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's $3.5 billion in a pipeline that's over years and years, but it's -- that's the committed funds to that business. And 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 hall. It was just unfortunately higher cost deposits.
Your next question comes from the line of Bernie Von Gizycki with Deutsche Bank.
John, in the beginning of the call, you noted you expect an ROA of 1.3% and a [indiscernible] 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 3 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 crisises, we've seen pressures on liquidity. We've seen outflows of deposits. And through that all, we've continued to post those kind of high teens, [ ROATC ] 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 9 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. 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%.
The next question comes from the line of Laurie Hunsicker with Seaport.
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 nonperformers, can you help us think about going from $135 million to $204 million in nonperformers in the quarter. Where we're seeing that jump where any details? Is it sponsor and specialty finance? Is it ABL? How much is next? Any color you can share with us there?
Yes. Laurie, I will try. We -- at a company our size, we sort of talk about specific credits, but there were, say, 4 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's any correlated risk. So if I told you they were 5 sponsor deals in a particular segment, I would be transparent and tell you that and say we're concerned about it and give you more portfolio detail but these were really idiosyncratic across 5 different categories across our C&I and one CRE deal. And again, I think the critical element is that our nonaccrual 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 portending 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 nonperformers.
Got it. And then just especially the sponsor and specialty book, how much is that nonperforming?
Can you repeat the question?
Yes, the sponsor and 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?
So the spot NIM at the end of the quarter was exactly where we were for the full quarter, so say, 335 spot deposit costs I said on the call, 224, so up 1 basis point from where we were for the quarter and loans down 2 basis points, so $622 million. 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 broker CDs, returns 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.