Webster Financial Corp
NYSE:WBS
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Webster Financial Corp
Earnings Call Analysis
Q4-2023 Analysis
Webster Financial Corp
The company reflects strong execution in a challenging environment, with an adjusted earnings per share (EPS) climb to $5.99 from $5.62 the previous year, highlighting its efficient operating model and focus on non-commoditized businesses. They have successfully enhanced tangible book value, sustained healthy returns on assets and equity, and maintained a well-optimized 42% efficiency ratio. Strategic acquisitions like Ametros, designed to inject a 25% compound annual growth rate in deposits over the next five years, underline the company’s robust position and eagerness for growth, expecting to be 3% accretive to 2025 earnings.
The company ended the fourth quarter on a high note, with a strong capital position and significant loan and securities growth. The late quarter loan and securities balance increase of over $1 billion positions the company well for future revenue, and the $1.5 billion rise in securities balances, partly due to value appreciation, sets the stage for a net interest income boost moving into the first quarter.
Deposit costs have risen slightly, but this is balanced by an uptick in higher-yielding deposit categories. Although there has been a dip in net interest income and a $10 million decrease in noninterest income, primarily due to changes in the credit valuation of customer derivatives, these are tempered by decreased expenses and a lower tax rate. The company’s outlook remains optimistic, with the anticipation of increases in net interest income and net interest margin in the first quarter.
Expense management remains a strong suit, with the company reporting a $2 million reduction from the previous quarter, reflecting sustained cost control efforts, leading to a steady efficiency ratio and minor savings in recurring costs such as FDIC insurance and technology expenses.
Looking into 2024, the company projects loan and deposit growth of 5% to 7%, net interest income between $2.4 billion to $2.45 billion, and noninterest income in the range of $375 million to $400 million, which includes contributions from the newly acquired Ametros. Expected noninterest expenses are set to be between $1.3 billion to $1.325 billion, and an effective tax rate of 21%. The company also remains committed to a disciplined capital management strategy, targeting a common equity Tier 1 ratio of around 10.5% and continuing share repurchases and strategic acquisitions.
With capital ratios well above regulatory requirements and a tangible book value of $32.39 a share, the company is positioned to create shareholder value while maintaining an advantageous capital foundation. The clear strategic direction, coupled with a solid financial framework, lays the groundwork for sustained growth and profitability.
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Good morning. Welcome to the Webster Financial Corporation's Fourth Quarter 2023 Earnings Conference Call. Please note this conference is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlen Harmon to introduce the call. Mr. Harmon, please go ahead.
Good morning. Before we begin our remarks, I want to remind you that the comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us.
The presentation accompanying management's remarks can be found on the company's Investor Relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant ask just 1 question and 1 follow-up before returning to the queue. I will now turn the call over to Webster Financial's CEO, John Ciulla.
Thanks a lot, Emlen. Good morning, everyone, and welcome to Webster Financial Corporation's Fourth Quarter 2023 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.
The company continues to execute at a high level, and we are excited about the momentum we are carrying into 2024. With less distraction from our integration activities and hopefully, the industry at large, we are well positioned to continue delivering financial outperformance as we deliver for our clients across business lines.
I'm going to start to review today with our full year results for 2023. As I've stated throughout the year, we performed admirably throughout a difficult period for the banking industry. This performance illustrates the strength of our franchise, including a uniquely diverse and sound funding base, highly efficient operating model and focus on non-commoditized businesses.
We grew our adjusted EPS to $5.99 from $5.62 in the prior year, generating record EPS for Webster. We reached a record tangible book value per share in the fourth quarter as well. Our return on assets was 1.43%, our return on tangible common equity was 20.5%, and we ended the year with a 42% efficiency ratio.
In addition to our strong financial performance, we realized several meaningful strategic accomplishments. We capably executed our core technology conversion and have completed substantially all of the work on our merger integration. We closed the interLINK acquisition and we announced the acquisition of Ametros. We grew core deposits through a highly competitive environment in the banking industry, illustrating our funding advantage and the strength of our relationship-oriented business model.
We also refined our mix of businesses, emphasizing and building those where we have a strategic advantage and the most promising risk/reward characteristics.
On the next slide, our fourth quarter financial results remain solid. On an adjusted basis, we produced a return on tangible common equity of 19.8% and a return on assets of nearly 1.4%. Our adjusted EPS was $1.46. We grew our deposits and loans each by roughly 1%, with loan growth focused in strategic commercial categories. We continue to exhibit solid expense control with an efficiency ratio of 43%.
Our common equity Tier 1 capital and tangible common equity remained strong at 11.12% and 7.73%, respectively. Our strong starting point and internal capital generation capability will provide us with a significant amount of operating flexibility over the long term.
The timing of some of our fourth quarter accomplishments, including our solid loan growth, were backloaded, resulting in a period-end loan and securities balance that were more than $1 billion higher than the average balances. Our overall loan growth, coupled with a robust pipeline should provide us with a tailwind as we head into 2024.
Following slide illustrates our funding diversity, which highlights one of our key strategic advantages. We are confident that we are adding another unique funding vertical with our acquisition of Ametros, which we announced at the end of last year and expect to close shortly. We provide some detail on the business on the following slide.
Ametros is a particularly unique and exciting opportunity for Webster as it provides low-cost, fast growing deposits, which adds significant fee income. To describe the business in brief, Ametros administers recipients funds for medical claim settlements via a proprietary technology platform and service teams. A large majority of the claims Ametros administered are structured as annuities, whereby funds are replenished over the life of the recipient.
As of today, there are over [ $2.5 billion ] of contracted deposit inflows under this construct. Given this replenishment feature, the average deposit duration exceeds 20 years. The collection and retention of these funds is further enhanced by the value-added services Ametros provides including payment management, access to discounted medical services and government reporting. They have an ardent customer base as evidenced by a Net Promoter Score of 96 and are by far the market leader among professional administrators.
We expect deposits will grow at a 25% CAGR over the ensuing 5 years. Our projected growth trajectory assumes the growth of members and no changes to Ametros existing business constitution, including the addition of new relationships, new business verticals, medical inflation or synergies with Webster's existing businesses. For all of these, we see varying degrees of opportunity. We anticipate the transaction will be modestly accretive to 2024 earnings and 3% accretive to 2025 earnings. We look forward to officially welcoming our new colleagues in the near future.
Our overall credit profile and key credit metrics remain fairly unchanged from prior quarter as we continue to proactively manage our credit exposures across the bank. Glenn will provide more detail in his comments.
On the next slide, I'll quickly touch on the standard overview of our Office CRE portfolio. We continue to make solid progress on reducing the size of this portfolio, which is down another $120 million this quarter. The majority of the reduction came from either payoffs or properties being repositioned. Overall performance of the portfolio continues to be relatively consistent with solid support underlying the credits. We did see a tick up in classified loans to 7.7% from 5% last quarter, but delinquencies and non-accruals are nonexistent.
Given we are getting to a much smaller absolute balance, we will likely move this slide to the appendix in future quarters. 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 7 with our GAAP and adjusted earnings for the fourth quarter. We reported GAAP net income to common shareholders of $181 million with earnings per share of $1.05. On an adjusted basis, we reported net income to common shareholders of $250 million and EPS of $1.46. The largest component of the adjustments were a $47 million FDIC special assessment, $31 million in merger-related expense and securities repositioning loss of $17 million.
Next, I'll review balance sheet trends beginning on Slide 8. Total assets were $75 billion at period end, up $1.8 billion from the third quarter. Our securities balances were up $1.5 billion from the third quarter, $400 million of the increase was attributed to value appreciation of our AFS portfolio while the remaining $1.1 billion reflects incremental action we took to reduce our asset sensitivity. Much of the securities growth occurred late in the fourth quarter with the associated net interest income benefit to be realized in the first quarter.
As I noted a moment ago, we also repositioned roughly $400 million of our securities portfolio with less than 1 year earn-back. This should result in a benefit of 3 basis points to our net interest margin in the first quarter.
Loans were up $640 million, driven by commercial categories. The majority of the growth occurred late in the quarter, resulting in a period-end balance that was higher than average by $375 million. Deposits grew by $450 million in the quarter, the net result of seasonal declines in public sector funds, offset by growth in CDs, interLINK and interest-bearing checking. Our loan-to-deposit ratio was 83%, flat to last quarter. Our capital levels remain strong. Common equity Tier 1 ratio was 11.12%, and our tangible common equity ratio was 7.7%.
Tangible book value increased to $32.39 per share or just under 10% quarter-over-quarter, reflecting earnings and the improvement in AOCI. In a steady interest rate environment, we anticipate $75 million of unrealized security losses would accrete back into capital annually.
Loan trends are highlighted on Slide 9. In total, loans were up roughly $650 million or 1.3% on a linked quarter basis. The Commercial Bank continues to drive loan trends where we grew the C&I and commercial real estate portfolios. On net, much of the growth was in low risk, lower-yielding portfolios. Growth in C&I was principally in fund banking and public sector finance as well as business banking. Commercial real estate growth was in stronger risk-rated portfolios, including multifamily.
Notably, we ran off remaining balances in mortgage warehouse. The yield on the loan portfolio increased 4 basis points. And floating and periodic loans were 59% of total loans at quarter end.
We provide additional detail on deposits on Slide 10. With total deposits of $450 million from prior quarter or 0.7%. We saw growth in all major deposit product categories with the exception of demand and money market accounts, where seasonality in public funds drove declines.
Our total deposit costs were up 19 basis points to 215 basis points or cumulative cycle-to-date total deposit beta of 40%.
On Slide 11, we rolled forward our deposit beta assumptions to incorporate the first quarter during which we anticipate our beta to reach 41%.
Moving to Slide 12. We highlight our reported to adjusted income statement compared to our adjusted earnings for the prior period. Overall, adjusted net income was down $17 million relative to prior quarter. Net interest income was down $16 million as anticipated balance sheet growth was achieved later in the quarter, and we continue to run off nonstrategic loans. Adjusted noninterest income was down $10 million, largely driven by a noncash swing in our modeled credit valuation adjustment on customer derivatives.
Partially offsetting these trends, expenses were down $1.6 million, and the provision was down $0.5 million. We also benefited from a lower tax rate, 19.5% this quarter, down from 20.1% in the third quarter as a result of state and local true-ups. Our efficiency ratio was 43%.
On Slide 13, we highlight net interest income, which declined $16 million linked quarter. This was driven by later than anticipated growth in our earning assets in addition to runoff of nonstrategic portfolios. Net interest margin decreased 7 basis points from the prior quarter to 3.42%. As a result of the timing of our fourth quarter earning asset growth and forecasted originations in Q1, we expect to grow both net interest income and NIM into the first quarter.
Our yield on earning assets increased 5 basis points over prior quarter. The pace of deposit pricing moderated to 19 basis points while the cost of total interest-bearing liabilities was up 14 basis points. The increase is driven by a periodic change in deposit mix primarily due to the seasonality -- seasonal decline in public funds with offsetting growth coming in higher-yielding deposit categories and wholesale funding.
On Slide 14, we highlight noninterest income, which was down $10 million to prior quarter on an adjusted basis. $8 million of the decline was attributable to a noncash swing in model credit valuation adjustment on customer derivatives. This resulted in a $4 million charge this quarter relative to a $4 million benefit last quarter. We also experienced seasonal decline in HSA interchange fees and transaction activity tied to commercial clients remained slow in the fourth quarter.
Noninterest expense is on Slide 15. We reported adjusted expenses of $299 million, down $2 million from the prior quarter. Reductions in reoccurring FDIC insurance and technology costs were partially offset by increased marketing and employee benefit costs.
Slide 16 details components of our allowance for credit losses, which was effectively flat relative to prior quarter. After recording $34 million in net charge-offs, we incurred a $34 million provision. $26 million of which was attributable to macro and credit factors and $8 million of which was attributable to loan growth. As a result, our allowance coverage to loans decreased modestly to 125 basis points from 127 basis points last quarter, in part reflecting the mix shift to loans with lower loss content.
Slide 17 highlights our key asset quality metrics. On the upper left, nonperforming assets are flat to prior quarter and up slightly to prior year with nonperforming loans representing just 41 basis points of total loans. Commercial classifieds as a percent of commercial loans increased to 182 basis points from 174 basis points as classified loans increased by $44 million on an absolute basis.
Net charge-offs on the upper right totaled $34 million or 27 basis points of average loans on an annualized basis. We divested another $51 million of commercial loans in the quarter and $21 million of residential loans. These divestitures resulted in $14 million of the $34 million in net charge-offs.
On Slide 18, we maintained strong capital levels. All capital levels remain in excess of regulatory and internal targets. Our common equity Tier 1 ratio was 11.12%, and our tangible common equity ratio was 7.7%, our tangible book value was $32.39 a share.
I'll wrap up my comments on Slide 19 with our outlook for 2024. The outlook includes the pro forma impact of Ametros, which directly impacts deposits, net interest income, fees and expenses. We expect to grow -- we expect loans to grow in the range of 5% to 7%. Growth will continue to be driven by our commercial businesses. Likewise, we expect deposits to grow 5% to 7%. We expect net interest income of $2.4 billion to $2.45 billion on a non-FTE basis. For those modeling net interest income on an FTE basis, I would add roughly $75 million to the outlook.
Our net interest income outlook assumes 4 decreases in the Fed funds rate beginning in May. Noninterest income is forecasted to be in the range of $375 million to $400 million. This includes approximately $25 million in fees generated by Ametros. Expenses are expected to be in the $1.3 billion to $1.325 billion. This includes approximately $50 million due to the addition of Ametros, representing both operating costs and the estimated intangible amortization.
Our efficiency ratio is expected to be in the low to mid-40% range. We expect an effective tax rate of 21%. We'll continue to be prudent managers of capital and target a common equity Tier 1 ratio of approximately 10.5%. With Ametros expected to close shortly, we anticipate revealing capital in the near term, after which we are committed to utilizing roughly 40% of our earnings for share repurchases and tuck-in acquisitions, similar to those that we have announced in the past couple of years. With that, I'll turn it back to John for closing remarks.
Thanks, Glenn. Despite continued industry headwinds, we remain optimistic about our prospects for 2024. Webster is in an advantageous position as we enter the year with good momentum. In a challenging year for the banking industry last year, we were able to add to our capabilities and grow the bank. Streamlining our technology will allow us to more efficiently improve our product and service offerings. We've also taken steps to reduce our earnings volatility.
Our funding position and capital generation provides us with a great opportunity to grow the company in strategically compelling areas. We'll continue to invest in our people and technology, further enabling that opportunity. Given these dynamics and the starting point for our efficiency ratio, we will make these investments while maintaining peer-leading profitability and returns.
I'm going to conclude my remarks with a few acknowledgments of thanks. As we near the 2-year anniversary of the merger with Sterling, [ Jack Kopnisky ] will move out of his role as Executive Chairman of the company, and I will become Chair. Jack's counsel and partnership in building our company has been valuable over the past 2 years, and the company would not be where it is today without his vision and significant contributions.
As this is the last earnings call prior to the February 1 transition, I want to take this opportunity to publicly offer our collective thanks to Jack. Thank you to our colleagues for their efforts and on behalf of our shareholders and clients. 2023 was a challenging year in terms of industry turmoil and the work that went into completing our core conversion. Our colleagues put in a ton of work building our franchise and achieving our 2023 financial results. Thank you all for joining us on the call today. Operator, Glenn and I will open the line for questions.
[Operator Instructions] Your first question comes from the line of Mark Fitzgibbon from Piper Sandler.
First question I had, Glenn, based on where yields are today, do you plan to continue to grow and extend the security book in the first quarter to sort of further reduce asset sensitivity?
Yes, Mark, thanks. We did, as you probably saw, we did add about $1.1 billion in securities at the end of the fourth quarter. So I think that bodes well going into the next couple of quarters. And actually, we did it opportunistically at a high rate environment. So we feel good about that. But the real intent was to further minimize our asset sensitivity.
But Glenn, do you plan to continue to do that in the first quarter?
Yes. I mean it will be -- not to the extent that it's $1 billion, but it will be at a smaller level and reinvest. We have approximately $300 million coming off a quarter in our investment securities portfolio, which will be reinvested.
Okay. And then just real quick, secondly, did you sell any office loans or loan notes in the quarter? And if so, where did you sell them relative to [ par ]?
We did, Mark. I would say, and we've been talking about this -- the kind of progressive decline in the market values. I think mid-80s, but the loan sales were smaller this quarter and they weren't all office. So we did do some balance sheet repositioning, but not as robustly and not in bulk like we had in the last few quarters. As I noted, the $120 million decline in the quarter in office, this quarter, interestingly, was primarily from payoffs and refinances at market and par. So we didn't do a lot of office sales this quarter.
Your next question comes from the line of Matt Breese from Stephens.
I was hoping you could touch on loan yields. Expansion was a bit less than I was expecting this quarter, up 4 bps to [ 6 ] in [ '24 ]. I was curious, one, what are incremental loan yields today, have they changed quarter-to-quarter? And then is the fact that we saw a slowdown in loan yield expansion tied to just the lack of Fed hikes? Or could you provide more color on that?
Yes. So let me -- I'll just hit the numbers at the beginning. So in the fourth quarter, our commercial loan yields were [ 760 ] [indiscernible] what was originated in the fourth quarter and total loans was pretty much the same range, I think, [ 758 ] somewhere around there. And -- go ahead.
Matt, so it's interesting, right? And obviously, we hit on it in the beginning. We had back-ended loan originations in the quarter, which hurt NII growth where -- and we also, if you look year-over-year, right, we have $650 million less in mortgage warehouse because we've exited that business. The other dynamic there is that the mix of business was high-quality non-office commercial real estate fund banking, which has almost a full point of lower weighted average risk rating, but on the other side, also lower yield in. So we didn't see as much origination, I would say, given market conditions and given credit appetite in sponsor and specialty. And so a little bit of the mutation, if you will, in the expansion of yield had to do with the loan mix in the fourth quarter as much as anything.
Got it. Okay. And then my second one, you had mentioned intangibles tied to Ametros. And I was curious what is the breakdown or the types of intangibles? And if it's CDI, what is the amortization methodology and time frame regarding that?
Yes, it's a great question. And when we're still working through the intangibles on that. We haven't closed on it yet, but it's a little different than the typical banking type of transaction in that these have a life somewhere in excess of 20 years. So you would expect the intangible amortization to be -- using in the bank space, it's the maximum of 10 years. But in this case, I think it would probably be further out than that.
But it's safe to assume it's a CDI versus [ goodwill ]?
Yes, primarily, yes.
Your next question comes from the line of Chris McGratty from KBW.
Maybe a question on capital. I think you basically said that you're going to pause on the buybacks for a bit until you build a little bit more post Ametros. I guess 2-part question. What's your best estimate for pro forma CET1 for the deal? And then anything precluding you from resuming buybacks maybe Q2, Q3?
Yes. So thanks, Chris. And what I said was that in the near term. And so I think that you can think about common equity Tier 1 coming right about down to our target level of 10.5% in the first quarter and then we begin to build capital from that.
Yes, that's exactly right. And I think we clearly have in our plan and expectations if there are no other productive uses of organic capital that we will look at dividend and repurchases in the latter half of the year, maybe the second, third and fourth quarter over time. We generally repurchase shares to offset grants to employees as well. We'll continue to do that. So it's still part of our game plan. We're just being, I think, a little bit cautious and prudent as we look at our capital levels through the Ametros closing. We also potentially have opportunities in balance sheet and securities repositioning that could go into that bucket of decisions as well. But we anticipate returning capital to shareholders over the second half of the year.
Okay. Great. And then maybe one on the NII guide. I think you've got an outlook that looks more similar to ours, which has a little bit fewer cuts than the futures market. If we were to get the 5, 6 cuts by 2024, how would your NII outlook change from what you provided?
So I think if we got 6 cuts and we have 4 cuts in there now, it would probably -- it's not really that significant to us. We do have some hedges that would kick in, but I think it's probably in the range just to give you a ballpark of $15 million to $20 million downside. So it's not that significant.
Okay. And that $15 million to $20 million is for 2024, given the case...
Yes, in 2024. So if you took our guidance at the low end and high end, you said we had 6 cuts, it would probably be in the range of you take out $15 million to $20 million on that.
Your next question comes from the line of Casey Haire from Jefferies.
Great. So Glenn, just following up on another one on the NII guide. So looking at Slide 11, giving us the [ cume ] beta in the first quarter to 41%. I was wondering if you could give us the progression throughout the year. Where does that [ cume ] beta peak in the tightening cycle? And then how does it progress after you get these 4 cuts beginning in May.
Yes. So I think it will be -- Casey, I think it will stay around that 41%, plus or minus. I think the dynamic there is going to be our deposit repricing. And so if you look at our book of $60 billion, about 20% or say $12 million of that book is what I would characterize as high beta no lag type of deposits. So those -- as the -- and think of Ametros is a perfect example, but almost $6 billion. I'm sorry, interLINK. I'm getting ahead of it. interLINK, say $6 billion, right? So that would reprice one-on-one with Fed funds. And it would be immediate. So that's an example of a high beta no lag type of deposits.
So I look at our deposit book, it's about 20%, sort of say, $12 billion or $13 billion or $60 billion. So that will be a benefit for us. So I think it will -- we'll probably end up around -- we're 41% plus or minus somewhere around there. The other factor you have is that our down deposit beta is probably going to run on a full year basis in the mid-20s, right? So that will help offset some of it as well.
And Ametros and just -- did bring up Ametros, that will lower our data because obviously, we're bringing in $800 million at a few basis points, and that's expected to grow by 25% a year.
Got you. Okay. And then just following up on sort of the fee and expense guide, implies a decent ramp from the current run rate. I know, obviously, Ametros is on the come here. Just wondering, can you break out what is what is organic or what is legacy Webster? And then what does Ametros add just so we can get a better feel for ramps?
Yes. Let me take a run at it and then John can add some color. So core expenses for -- were $1.2 billion, say, in 2023. And as you saw, the guidance, $1.3 billion to $1.325 billion in '24. So round numbers, that represents growth of like $100 million to $125 million. And if you peel that back, I would say, approximately $50 million is tied to Ametros. And so that includes operating costs, associated with 150 employees, the technology platform along with the intangible amortization.
And about half of the remaining -- so that's $50 million and about half the remaining is tied to performance-based comp, right? So $20 million [indiscernible] of performance fee based comp and then another $40 million tied to investments in revenue-generating type of business lines. So you got $40 million from performance-based comp, another -- or $20 million from performance-based comp, $40 million from investment in the business and then $50 million on Ametros in very broad numbers.
And then the fees he asked.
Okay. So on NII, so our -- yes, noninterest income, sorry. So core net interest income, $348 million for 2023. We're projecting $375 million to $400 million. So you got $25 million to $50 million in year-over-year growth and about $25 million of that is tied to Ametros, right, which is a mix of account administration fees, pharmacy and other transactional sort of rebate type of fees. The remaining growth is sort of across a number of categories like HSA interchange up $4 million to $5 million, commercial lending fees, which includes swaps, syndication and transactional type of fees, $3 million to $5 million, trust and investment fees and some smaller in cash management fees. So that gives you the sort of geography of it.
And Casey, to put a finer point on expenses, right? It looks like a high headline number, but to Glenn's point, half of the increase in the guided expenses really are related to Ametros acquisition of those expenses, as Glenn said, part of it is OpEx and part of it is the amortization of intangibles and then you have performance-based compensation year-over-year, an increase in expectation, which most of the industry is seeing.
If you then look down, the remaining increase in core expenses is about 4% or slightly under. And that has some investment in teams and people and projects and technology. Even if we execute all of those things with our range of expectations, we're still going to be in the low to mid-40% from an efficiency perspective which I think is unique for us, giving us the opportunity to be on offense and to continue to invest into the kind of revenue tailwinds and the rate decline. So -- and obviously, we have opportunities should the tailwinds with respect to NII or fees get higher than we expect to curtail and time -- on the timing on some of those investments and lower expenses if we need to.
So I feel pretty good about where we are, ending up at those financial metrics we promised over time given the guidance we've given. And I think the headline number on the expenses really needs to kind of peel it back and realize that half of it is not organic. It's the acquisition and the rest of it is kind of performance-based and investment in new revenue opportunities.
Your next question comes from the line of Manan Gosalia from Morgan Stanley.
Can you talk about the guidance for the 5% to 7% loan growth in 2024. Where do you see that growth coming from? And I guess, what do you view as a catalyst, right? Like how much help do you need from the environment to get to that high end of that range?
Yes, I think that's a great question. And obviously, we realize that the 5% to 7% guide is kind of on the top end of what you're seeing in the market. And the good news from our advantage point is we hope that we've got a good finger on the pulse of our pipeline and our clients and the markets and the sectors we serve. So what I would say is we're not projecting that with a hope and pray attitude that the market conditions improve. We're understanding our original assumptions going in were that we would have higher loan growth than that. And so I really do think we've got a lot of opportunity.
We've gone through our pipelines in commercial. The majority of the originations in the loan growth will come in those commercial categories, which will be non-office cree, commercial public sector finance, sponsor and specialty, general C&I end market and fund banking. Those are the areas we obviously have good equipment finance and ABL capabilities too. But I would say those core commercial categories where the growth is.
And the other finer point in talking to our Head of Commercial Banking and looking at our pipeline going forward and the momentum we had at the end of the quarter in terms of booking is that you're seeing -- while you may not see overall loan demand starting to flourish, obviously, it's still a bit muted. In some of the transactional areas, we're starting to see more trading of assets and more transactional activity. And for us, for Webster, in our unique businesses, that means real estate investors, private equity sponsors who are starting to see more activity in terms of buying and selling assets or buying and selling companies and that's why we've seen our pipeline grow significantly as we head into the first quarter.
We'll obviously keep people updated as we go quarter-to-quarter. But right now, we've got a good level of confidence that, that 5% [ bogey ] on the low end of the range is something that's attainable without taking too much risk and continuing to execute kind of within our underwriting boxes and with our existing strategies around segments and geography.
Very helpful. And then if you could speak a little bit about the credit side, especially on commercial credit. I know there was a smaller increase this quarter on the commercial classified loan bucket. But if you can expand on what you're seeing there? And if you could dig in a little bit on what you're seeing in non-office CRE?
Sure. We're not really seeing any degradation in -- I'll start with your last question, in non-office and we seem to be managing maturities well and sponsors and owners seem to be connected to their loans. So I wouldn't note any significant deterioration there at all. I think the way I characterize the quarter from a credit perspective as being relatively unchanged from prior quarter is pretty accurate. We had a few loans in C&I go into classified. We also reduced our nonperformers modestly. So we kind of had some offsets there. And the overall credit profile remains stable.
We're not seeing any -- and again, I haven't dealt with you a lot, but many know that I was the Chief Credit Risk Officer during the great recession and thereafter. I have been surprised like many of us that there's been no capitulation in certain areas, right? And we're still seeing significant resiliency in the consumer. We have no issues at all in our home equity and mortgage loans with respect to delinquencies or issues. And in C&I, people have been pretty resilient, and we're seeing some level of investment. The areas that we still focus on, I would say, in sponsor and specialty health care services, those are sort of secular pressures, contracting, which generally is cyclical, but we've done a good job proactively either avoiding certain sectors and certain opportunities or being able to remediate things quickly. And then obviously, you've seen us reduce our office exposure [indiscernible] by almost $700 million over the course of the last 5 or 6 quarters without material loss.
So I think the overall net risk rating migration in the portfolio continues to be modestly to the downside. But with proactive risk management and working through things, we're not seeing any material areas of stress in the portfolio. Even if you look at the charge-off numbers, I think for the year, we ended up at about 22 basis points. Interestingly, that's kind of the same as the 5-year average pre-pandemic. So you really -- that gives you a perspective of where credit performance is now even to pre-pandemic levels. And within that 22 basis points, 10 basis points of the 22 basis points is related to proactive balance sheet management and loan sales. So we really haven't seen kind of the credit wave that I think people have been expecting for time, but we continue to monitor pretty aggressively.
Your next question comes from the line of Daniel Tamayo from Raymond James.
Just a quick one, almost all my questions have been asked at this point. But just I guess to put a finer point on the intent amortization discussion around the Ametros expenses in 2024, did you have a number that is baked into your forecast that we could just pull out the operating of Ametros from?
So what I would say is we said expenses would be up $50 million, and I would say about half of that is going to be intangible amortization.
Your next question comes from the line of Steven Alexopoulos from JP Morgan.
I want to go back to the margin for you, Glenn. So the NIM at [ 342 ] is fairly strong, right? Many of your peers are in the 2% club. As we think about the potential for Fed cuts, right, which is a short-term negative, given an asset-sensitive balance sheet, the long-term positive, given the potential for a steeper curve, put this together for us, like how do you think the NIM? Does the NIM trend up in early part of '24 and then down once we start getting those cuts. And then once we do get a normal curve, how do you think about a normal NIM versus where you are in 4Q?
Yes. Thanks, Steve. So I think the [ 342 ] is sort of more of an anomaly for us given the originations that occurred. John, I think, highlighted in his remarks, over $1 billion of loan origination, securities originations at the end of the quarter. So we'll get the full benefit of that as we get into the first quarter. And then if you add things like a Ametros and you just think of it like mathematically, $800 million is coming in. At a minimum, we're going to pay down FHLB borrowings that are [ 5 ], [ 5.25 ], right? So you get the immediate benefit of that. And that will carry out for the whole year, so that will support our NIM.
The other thing, and I know we've talked about this in the past is we continue to have this dynamic, as I think all due, that fixed rate loans are repricing. So for us, it's like $1 billion to $1.2 billion in some quarters of fixed rate loans that are repricing. And to the extent they reprice into fixed rate loans, you're picking up 200 basis points. So that's added to NIM as well.
The securities purchases, like we talked about at the end of the quarter, you get the full year benefit of that. When you think about the restructuring we did on $400 million, we probably picked up about 400 basis points on that. These are all additive to NIM. And I think what's the dynamic here is that you'll see NIM support it in the first couple of quarters, and that will carry out through the year, you'll see -- we are asset sensitive. So in the back half of the year, as the Fed starts to cut, you'll see NIM -- you'll see deposit costs begin to -- which will initially be a lag, will begin to reprice down as well.
So all that ins and outs and there's a lot of moving pieces as I'm sure you can appreciate. I would expect that the NIM would be in the range of [ 345 ] with some potential upside, depending on how the balance sheet rolls out.
Yes. And Steve, I think you have the dynamic right, right? We get some opportunity in the near term, a little more pressure in the long term this year when they start cutting. But as Glenn said, we feel pretty confident given the moves we've made that we can keep that NIM relatively stable at a rate better than most of the industry.
Got it. Okay. And then I had a question on HSA Bank, which had a decent year overall for 2023. So as you guys know, there was quite a bit of speculation since the last earnings call in terms of your appetite to retain the business. John, could you frame for us how you look at HSA Bank today, right? I look at the Slide 4 and I say, "Well, maybe it's not as important as it used to be to the franchise". And do you feel that the value of HSA Bank is being held back by being inside of Webster. Can you give me an update there?
Sure. I don't. So I'll answer the question kind of short term. And it's every bit as important to us as it's been. Obviously, it's from a pure financial contribution perspective, given the size of the organization now, it's a slightly smaller contributor. But nonetheless, hugely important to us from a revenue and fee and obviously, low-cost, long-duration deposit perspective.
I can clarify on this call because I knew there was a lot of activity and speculation after our last phone call. I answered that question the way I had answered it every single quarter when asked. What happened, Steve, was that no one asked the question for about 6 quarters. So people thought because I gave an answer that there was a new perspective. No, we are not a seller of HSA. We are a true believer particularly with the acquisition of Ametros in our ability, unique ability as a bank to have diversified funding sources that grow fees at a good clip, and I think we'll be able to -- and not included in our forecast, as I mentioned, are opportunities for us to have cross synergies in some of these really unique businesses, even throw interLINK in there as well.
But I also do say very carefully every time that we're a steward of our shareholders' capital. And so we continually have to evaluate all of our business lines, how we can maximize economic profit in those business lines and whether or not that happens as a wholly owned activity or as a joint venture activity or as a sold activity and so our premise is we're not a seller of HSA. But obviously, we're always doing diligence to make sure that we're not missing an opportunity to achieve the best value for our shareholders as we allocate capital and make those decisions.
Got it. That's helpful color. John, if I could squeeze 1 more in and violate your 2-question rule. So just regarding this $100 billion potential threshold. So you guys ended the year at $75 billion and when we look at some of your peers in the similar asset range, a lot of them are on an RWA diet, right? But when you look at your 2024 guidance, you guys seem to want to be at the buffet. So when you look in that, do you see no reason to slow growth, like you feel like you're very prepared, you know those rules could change, but that's no reason to slow your growth in terms of trying to manage the time line to get there? Just what gives you so much more confidence than some of your peers?
Yes. That's a loaded question. I mean, I think that -- look, I think we have a ways to go before we hit the threshold. As you can imagine, we're spending a lot of time looking at our 3- and 5-year plans making sure that we're prepared from a compliance and risk management perspective, making sure we understand the full impact of the rules if they ultimately are enacted on capital, on liquidity, on the makeup of our balance sheet.
Steve, I think we've got enough flexibility in the asset classes that we grow, we can make economic moves to divest or to slow growth quickly. And we're not up against the gun with respect to looking at this over the next 18 to 24 months. I think we still have some running room to service customers, to take care of our existing clients and continue to plan for the eventuality of $100 billion. And so we don't think that it's time to pull back and slow growth now. But every move we're making and everything we're doing strategically, we obviously have an eye toward what's that mean when you overlay the $100 billion requirement.
So I know that may not be a satisfying answer, but know that we're thinking about it. We're thinking about what it means for our future view on M&A. Do you want to crawl over $100 billion? Do you want to avoid it? Do you want to jump well over $100 billion? Those are the discussions we're having. And we're positioning ourselves, quite frankly, because of the uncertainty in the market to be able to take advantage of any one of those strategies if it's the right strategy at the time. So I don't think we're putting ourselves in a trapped position by continuing to use our differentiated funding base and origination channels to continue to grow at this pace. I don't think we are.
Your next question comes from the line of Brody Preston from UBS.
Glenn, I just wanted to follow up on the securities purchases and restructure with a couple of questions. The purchase yield was 6.79% this quarter. So one, what are you buying? And then two, just given the end of quarter purchases, the restructurings, what was the spot rate -- spot yield for securities at the end of the quarter?
Sure. So first on the question, we sold, like I said, $408 million. I think the yield on that was like 128 basis points. And most of what we bought really during the quarter was [ MBS ] and with it, say, a 3.8-year duration and a book yield of say [ 580 ], [ 585 ]. Does that answer that part?
Yes, it does. It does.
Okay. And then the securities yield, I think [indiscernible] is [ 346 ] quarter end.
Okay. And so you continue to plan to purchase securities if I heard your response to Mark correctly, in the first quarter. So I'm assuming that you're going to continue purchasing at similar yields that you did.
Yes, reinvesting. Like if you think of our securities [indiscernible] spins off about $300 million a quarter, we would reinvest that and roll it.
Okay. Got it. And then just for my follow-up, I just wanted to touch on Ametros again. Thank you for kind of talking about the CDI expense. But I wanted to ask just the 25% CAGR on the surface, it seems like a pretty aggressive kind of growth target just given we're bank analysts. But I was hoping maybe you could discuss maybe setting the synergies aside, why you think that's the appropriate kind of growth target? And where are there areas of conservatism within that guidance where you could kind of outperform it organically even without synergies?
Yes. Remember, it's off a pretty small base, and we've got historic data, and there's a great management team there and a great team and they've demonstrated the ability to do it. As I noted, there really is a pretty strong pipeline. You can see the natural growth. It's kind of HSA, it's very predictable. And it's also like HSA a little bit, and they have great relationships with both their account holders and the insurance companies that they do work for. And so we've got pretty good line of sight to growth off a relatively small base going forward.
And you've got kind of -- a bunch of that is contracted future payments. So you kind of know what's coming in. So I think we feel pretty comfortable that, that's kind of a reasonable range. Where we see the upside, I mentioned it in my comments. We don't factor in right now any other expansion into different product sets with similar characteristics. And I know the CEO there, who's really talented, has good line of sight with capital investment behind him to be able to expand the markets that they serve. We don't factor in any synergies between account holders in some of our other businesses and cross-sell opportunities. So the upside is really our opportunity to figure out new ways for them to do it. But in terms of our baseline, 25% CAGR growth, we feel very confident that, that's kind of a very predictable, strong line of sight to that growth over the next 5 years.
Got it. If I could sneak 1 more in. Just given the strength of the business on a stand-alone basis, I know it's smaller for you guys, but just given the pipeline, given the growth outlook, why did [ Longridge ] think it was the right time for them to sell just because it seems like there's going to be a lot of strength in that business line going forward.
Yes, there's no story there at all. It's just a natural private equity investment, and it was time for them to divest. We knew the company through our relationships with sponsor and specialty, and I -- it wasn't an auction process. We were able to convince the team and the sellers that we were the right buyer and it was a very smooth transaction. So there's no story there, and that's it.
Your next question comes from the line of Jon Arfstrom from RBC Capital Markets.
Just a couple of cleanup questions. On the loan trajectory, just dissecting that, what drove the late quarter growth? And just talk a little bit about what changed and what the drivers were.
Yes. Most of the originations were driven in the quarter by core C&I, but in particular, fund banking, very low risk and lower yielding, quite frankly, but obviously, we believe still economically profitable loan growth along with some high-quality multifamily and some public sector finance, which is kind of our national government banking.
Again, all of those assets, higher quality than the overall portfolio on a risk-weighted basis, slightly lower yielding, which was why we gave the answer to the question earlier about lower-than-expected yield expansion in the quarter. And again, particularly in the fund banking side, much of that closed by year-end. And so we were kind of working through our pipeline, and that's why things closed in December as opposed to closing earlier in the quarter.
Okay. So no real story, just given [indiscernible].
Yes, just timing, and it happens quarter-to-quarter.
Okay. Okay. Just second question, bigger picture, John. It seems like the Sterling merger has gone well. It seems like you and Jack have been on the same page. But any new priorities for you as Chairman, I'm assuming it's business as usual, but thought I would ask as long as you mentioned it.
No, we are -- we're completely aligned and will continue to be. And obviously, I'll continue to seek out his counsel even after he left the organization. But no, there's no pivot at all. We spent a lot of time, the entire team, management team and Board, making sure that kind of we knew what the north star was and what we were trying to build and we're still on that journey. We still have opportunities. We think we've got good line of sight to continue to deliver a 20%-ish ROTC, a 1.4-ish ROA and a leading efficiency ratio to give us flexibility to grow and I think all the things we're doing are the things we thought we would do.
Obviously, the environment has been a little bit volatile over time, but there'll be no pivot in culture strategy or other things. You'll see us continue to try and execute at a high level.
Your next question comes from the line of Bernard Von Gizycki from Deutsche Bank.
Maybe just staying on Sterling. With integration now past you, there's been discussions with the opportunities to enhance some of the areas in fee income across commercial, consumer, HSA. You talked about treasury cash management, card, FX as areas of growth. But can you provide any size timing of these opportunities, if possible? What could be implied in your guide for '24?
Yes. I mean, as you know, on the cash management, card, FX and some of the other ancillary businesses, we do have built in, as Glenn mentioned, into our increase in fees relatively good, double-digit growth in those off of a relatively small base compared to our NII. And the truth of the matter is those activities are not going to materially change the outcome of our steady growth, right? So that's -- we're working on those things. We've already rolled out new capabilities for our clients.
Things like AMetros moved the needle a little bit in terms of -- Glenn talked to you about the contribution in expected fees in the year. And so that's going to be good. We keep looking at interesting opportunities and not built into our forecast and definitely too early to talk about, but opportunities around capital markets, around syndicating around securitization, like are there opportunities given our strong origination capabilities to generate fee income and further have other options to manage the balance sheet.
But those are things we think about to drive fee income over the long term, but nothing in our plans right now and nothing that I would be comfortable giving you guidance on.
Understood. I think last quarter, maybe just talking about the expenses. The expense opportunities that still remain. I think you talked about consolidation of some other back-office processes and call center consolidation. Maybe could you help frame any of the remaining opportunity on this front?
Yes. I think Glenn, my comment, but I think that's sort of built into our overall net expense view. Some of the stuff that's a little stickier than others. We've made progress on consolidation of the call centers. We have opportunity there. We still need to decommission some old non-core technology that in the transition stays. But I would say it's an offset to the investments that we think we're going to make in future technology. And so I don't know if you -- [ don't ] estimate for what you think the full run rate of some of those opportunities.
Yes. But I would just come back to mid- to low 40% efficiency ratio, and that's where we expect to be. And so what that implies is it gives us, first of all, optionality to the extent there's more market headwinds. So we have some optionality there. But I also think that the more important point is that we are still getting -- I know as the CFO, in my world, we are still consolidating ledgers and there's implications down to reconciliations and stuff like that, but that gives us an opportunity to reinvest in the business as well.
So I think we like to think of it as we're best-in-class at 45 to low 40s -- low to mid-40s on the efficiency ratio. And so I would just -- if you're thinking of modeling it, that's what I would use as a guide.
Your next question comes from the line of Ben Gerlinger from Citigroup.
Think about just the deposit franchise in general. I think Casey asked the question, you gave some deposit beta assumptions on your different niches. I was just curious if you -- if the forward curve is correct, or even just 4 cut assumption. Are there any flow differences or what you might see in a deposit mix in general? I get that it's down 100 basis points in a non-recessionary environment is kind of unprecedented. But just kind of just your thoughts on what that deposit mix might look like, how flows might change over the course of those 100 bps going forward?
Yes, it's a good question. So there's a couple of things that I think are unique to us. And obviously, we talked a lot about Ametros. We do have the benefit of HSA as well, where we get the enrollment period in the first quarter, and then we continue to get those accounts funded during the year.
We have interLINK, which gives us optionality from the ability to increase core deposits or to the extent we have -- we're satisfied with our loan-to-deposit ratio to [ lay ] some [indiscernible]. So that gives us optionality as well. I think the thing that we're watching is as far as the flow of deposits, we do have maturities on CDs coming due about $2 billion in the first quarter, another -- just under that in the second quarter. So that's something that we're keeping a close eye on how that rolls over. And we're also keeping an eye on things like demand or pure DDA, which has come down a little bit. So we're basically -- we've been hovering around that $11 billion mark.
We think that probably has potential to grow about $200 million over the course of the year. So those are the sort of things that we're thinking. I don't see anything significant. I think you'll still see a little bit more of deposits flow from low interest-bearing type of money market and savings accounts into CDs to the extent people or our clients think that rates are going to drop. They might want to go a little longer on their investments and things like that. We have to continue to see that. But I think that's -- those are very basic dynamics.
Yes, I would agree with Glenn. And I think -- I hope we're answering the question you're asking, which is the first 100 points down. I don't think it changes necessarily behaviors by customers and depositors or kind of overall bank, nonbank deposit flows.
Got you. That's really helpful. And then just from a follow-up, just to play a little bit of devil's advocate here. I know that you said that the forward curve is correct, there's kind of the 6-ish cuts. You probably have a little bit of downside relative to that NII range, which is the reality, you probably [ quit ] your revenue at the floor, maybe a little bit below the combined range today? And I know you said you had flexibility on expenses. Could you also put expenses overall below the [ $1.3 billion ]? Or is that kind of the floor in terms of investment. And we just expect a slightly higher efficiency ratio for the year?
Well, interesting question. I mean I think we always have optionality, right, because some of it is project-based and investment-based and if the market conditions change and are more dramatic than the projected performance-based incentive comp, cut in the line comes down naturally. So that -- there's -- we can clearly go below the $1.3 billion if the overall environment demanded us to do that. But I would say, again, kind of dramatically that we believe we have the opportunity to invest. And even at those expense levels, we'll still have the most efficient operating model in the top banks. And so yes, we do have flexibility. There are some variable costs in there and some project-based investments that we could either delay or cancel or pull back on if we had to.
Your next question comes from the line of Laurie Hunsicker from Seaport Research Partners.
Just going back to Ametros here, can you help us think what the pro forma intangibles will look like? And also just maybe fine-tune a little bit when the closing date is expected in this first quarter?
So on the pro forma, I think you can think of it as bringing an $800 million immediately in deposits and the immediate action would be to pay down FHLP and so call that 5% to 5.25% [ rate ] on those. And then it would eventually quickly move into funding loans, which you heard me say earlier are more in the range of like 7.5%. I talked about the fee income being $25 million, and I talked about the expenses in the range of $50 million, with half of that being CDI. So I think you can build the P&L pretty quickly.
The thing I would point out, as John and we talked earlier, is that this is a business that's going to grow at 25% CAGR every year. So we're bringing in $800 million, good chance we'll be closer to the $1 billion range by the end of this year. So -- and that will continue based on contractual relationships and everything that we see in the market. So that should allow you to build your sort of P&L.
Closing date...
And Pro forma intangibles.
So yes, of the intangibles side -- of the $50 million expense, I think it's about half of that and date, relatively soon.
End of January is the estimate, plus or minus.
So just on the pro forma intangibles, so your $2.835 billion growth by about $25 million. That's it. Did I hear that right?
I'm not sure, say that again.
So your $2.835 billion that you have in total intangibles on your balance sheet, your goodwill and other intangible assets. That grows by $25 million with this acquisition?
No, the intangible amortization is about $25 million in the year.
Got it. Okay. So what is the dollar amount of the...
So the intangibles were probably close to like $300 million.
$300 million, great. That was the number I was looking for.
We are not complete on that. I'm estimating that right now.
Got you. Makes sense. And then just going back to office. What were the office charge-offs in the fourth quarter? And if you have it, what were the office charge-offs for your full year [ 2022 ]?
Let me see if I can get that for you, Laurie. It was... they weren't meaningful in this quarter. I think charges, including all the proactive note sales were roughly in the $25 million to $30 million range for the entire year. And that includes all of, as I said, the proactive note sales, so not sort of fully mature charge-offs. I mean their losses nonetheless. And I think it wasn't particularly a meaningful contribution to this quarter's charge-offs. I'm still looking for the number, I apologize. But as I said, we're getting to the point where that book, we feel pretty confident around kind of what's left and the credit support we have underlying it. And we feel really good about how aggressively we brought down that exposure.
Your next question comes from the line of Timur Braziler from Wells Fargo.
Maybe circling back on Ametros, just one more there. What's the total addressable market for that space? And I guess as that business grows, what's the risk of new competition coming in and maybe eating away of some of that 25% expected CAGR?
Yes. It's obviously -- they are the market leader, but there's a huge untapped. I think that's $12 billion in total claims in their space right now. So there's a lot of running room. It's early days, and their value proposition, I think, is starting to be realized by more of the insurers and more account holders in the industry. So it's very low penetrated from a professional administrator perspective, which is one of the things that we think is so exciting about the business.
And is there a risk that maybe some of that competition eats into your growth rate?
I don't -- again, given the total addressable market and the good penetration that these guys have with respect to customer base, I think a lot of it is contractual. And so I think at least in terms of our projections now, we don't see any risk from cannibalization from competitors. And it's our opportunity, I think, to be a first mover across the industry and to continue to expand.
Great. And then my follow-up, just looking at New York City multifamily. Can you give us the breakdown of rent regulated versus market rate properties? And to the extent you have any exposure to pre-2019 HS TPA rule change?
Yes, very little exposure to pre-2019, I would say about, let's see, after the -- more than half of our loans are booked after the regulation. Multifamily was $1.35 billion in 4Q of regulated multifamily, down from the 3rd Q level of $1.4 billion. This is an interesting stat for you that the portfolio is obviously diversified, but the average commitment is $3.2 million. We only have 7 loans with exposures over $15 million there. So a very granular and nonchunky portfolio with no [ telltrees ] which I think makes us feel pretty comfortable and criticized classified loans are kind of below the overall credit stats of the rest of the commercial book. And so there's only 1 delinquent loan right now in that $1.35 billion. So we don't see any credit story there right now.
We have no further questions in our queue at this time. I will now turn the call back over to John Ciulla for closing remarks.
Thank you. Really appreciate everybody staying on the call and your engagement with the company. Have a great day.
This concludes today's conference call. Thank you for your participation, and you may now disconnect.