Webster Financial Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

Key Takeaways

  • On an adjusted basis, Webster delivered ROA of 1.26%, ROTCE of 17.9% and EPS of $1.35, supported by $1.8 billion in core deposit growth and a 45% efficiency ratio.
  • Net interest income came in softer than anticipated, prompting Webster to guide full-year NII to the lower end of its previous $2.4 billion range as loan yields lag and deposit costs rise.
  • The acquisition of Amitros closed in January, adding $870 million of low-cost, rapidly growing deposits and fee income, with deposits expected to grow at a 25% CAGR over five years.
  • Credit metrics showed negative risk-rating migration and a rise in classified loans, though asset quality remains solid with CRE classified loans at 1.5% and nonaccruals at 10 bps.
  • For 2024, Webster expects ∼5% loan and deposit growth, NII of ~$2.4 billion, adjusted expenses of $1.3–1.325 billion, an efficiency ratio in the low-mid 40% range, and ROA/ROTCE of ~1.3%/>18%.
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Earnings Conference Call
Webster Financial Q1 2024
00:00 / 00:00

There are 13 speakers on the call.

Operator

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, Emlyn Harmon, to introduce the call. Mr. Harmon, please go ahead.

Speaker 1

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.

Speaker 1

I will now turn it over to Webster Financial CEO and Chairman, John Ciulla.

Speaker 2

Thanks, Henlin. Good morning, and welcome to Webster Financial Corporation's Q1 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.

Speaker 2

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 Q4, Webster launched the Your Home program, a special purpose credit program offering down payment assistance and flexible credit requirements to help expand homeownership opportunities for low to moderate income first time homebuyers. The Your 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 $1,700,000 into 9 labs under this initiative.

Speaker 2

Our colleagues share this commitment to service. Last year, Webster volunteers gave nearly 17,000 hours of their time to nearly 500 community organizations across our footprint.

Speaker 3

These are just a few examples of how Webster and our

Speaker 2

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 dollars We are pleased to grow client deposits by $1,800,000,000 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 $240,000,000 of loans to held for sale.

Speaker 2

Our $1,600,000,000 in funded loan originations this quarter were driven by high quality C and I CRE categories, including fund banking and public sector finance and CRE and property types with solid operating dynamics. Our efficiency ratio was 45% in line with the low to mid-40s range we expect to operate in for the year. Our interest income performance was softer than originally anticipated as a number of factors led to lower than expected loan yields and we saw our deposits continue to reprice higher, albeit at a moderated rate. Despite these dynamics, we still anticipate that NII for the full year will be in the lower range of the guidance we provided in January, assuming loan demand and credit quality of that loan demand cooperate. Structurally and longer term, we should continue to generate returns near the top of our peer group given the strategic advantage provided by our funding profile and business mix and the operating flexibility we have created in terms of our liquidity and capital positions.

Speaker 2

We anticipate the ability to generate return on assets in the range of 1.3% and a return on tangible common equity in excess of 18% for the full year 'twenty four and beyond. Our recently closed acquisition of Amitros augments our competitive position. On the next slide, we provided the overview of Amitros as a reminder of the business fundamentals now that they are officially a subsidiary of Webster. Mitros 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, a Mitros administers recipients funds from medical claims settlements via a proprietary technology platform and service teams.

Speaker 2

Mitros is already illustrating its growth potential as it has grown to $870,000,000 in deposit balances relative to $805,000,000 in deposit balances when we announced the acquisition in December. It is our expectation that Nutros 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 the metros. As you will see on subsequent slides, we have combined Amitros with HSA Bank in a segment we've named Healthcare Financial Services, with the segment reporting to our talented President and COO, Luis Massiani. For the foreseeable future, we will continue to provide business specific performance measures for both Amitros and HSA Bank.

Speaker 2

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.

Speaker 2

Our commercial real estate portfolio is diversified by geography and product type, is conservatively underwritten and has continued to perform well from an asset quality perspective. In its entirety, our commercial real estate portfolio has a weighted average origination LTV of 56% and an amortizing debt service coverage ratio of 1.5 times. Classified loans are 1.5% of the portfolio with non accruals of just 10 basis points. As rent regulated multifamily lending has been in focus this quarter, we provided some of the attributes of our portfolio on this slide as well. As you can see in the incremental detail we provide here, our modestly sized portfolio is granular, was underwritten the conservative LTVs and debt service coverage ratios and has limited maturities in the next 2 years.

Speaker 2

Additionally, a majority of the book was underwritten following the Housing Stability Act passed in 2019. Therefore, our expectations for the performance of those properties incorporates the unfavorable effects of this legislation on property cash flows. In this category, the average loan size is 3,500,000

Speaker 3

dollars We

Speaker 2

have only 7 exposures greater than $15,000,000 and our largest rent regulated multifamily loan is now $49,000,000 Given the underwriting of the loans and client selection, the credit performance of this portfolio has been solid as illustrated by just 10 basis points in classified loans and non accruals. 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 $217,000,000 In addition to the information here, there are 2 additional slides at the front of the supplement to this presentation that provides significant detail on our overall CRE portfolio, highlighting the diversity of the portfolio in terms of property type and geography. Importantly, we have been disciplined in terms of hold levels over time as there are relatively few tall trees in terms of single point exposures across our various portfolios.

Speaker 2

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 $50,000,000 CRE category. With that, I'll turn it over to Glenn to cover our financials in more detail. Thanks, John, and

Speaker 3

good morning, everyone. I'll start on Slide 6 with our GAAP and adjusted earnings for the Q1. We reported GAAP net income to common shareholders of $212,000,000 with diluted earnings per share of $1.23 On an adjusted basis, we reported net income to common shareholders of $233,000,000 and diluted EPS of $1.35 The largest component of the adjustments was in addition to the estimated FDIC special assessment of $12,000,000 dollars a one time tax adjustment of $11,000,000 $3,000,000 in the metros 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.

Speaker 3

Next, I'll review the balance sheet trends beginning on Slide 7. Total assets were $76,000,000,000 at period end, up $1,200,000,000 from the 4th quarter. Our security balances were up $250,000,000 relative to the 4th quarter. The yield on the portfolio increased 29 basis points linked quarter to 3.64 percent via the combination of growth, reinvestment of cash flows and $388,000,000 in restructuring executed this quarter. Loans were up $373,000,000 driven by commercial categories and reflective of opportunities to gain market share.

Speaker 3

While total deposits were flat, we grew core deposits $1,500,000,000 and retail CDs $350,000,000 which was offset by a decline in broker deposits. As John noted, and you can see on this slide, we have aligned Dimitros and HSA Bank segment presentation purposes, while still providing the same data on HSA Bank that we have historically. Loan to deposit ratio was 84% in the range of where we expect to operate over the next few quarters. Borrowings increased $1,000,000,000 as we use them for liquidity purposes given the managed decline in brokered deposits. Capital levels remained strong.

Speaker 3

The common equity Tier 1 ratio was 10.5% and our tangible common equity ratio was 7.15 percent, both lower than prior quarter, primarily as a result of the Imitros 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 $100,000,000 of unrealized security losses would accrete back into the capital annually. Loan trends are highlighted on Slide 8. In total, loans were up roughly CAD373 1,000,000 or 0.7 percent on a linked quarter basis.

Speaker 3

We reclassified $240,000,000 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 $275,000,000 in multifamily $424,000,000 in general commercial real estate categories. The yield on the portfolio was flat relative to prior quarter as a result of a shift in mix offsetting higher loan origination yields.

Speaker 3

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 $1,500,000,000 and retail CDs $350,000,000 this quarter. Given the strength of our core deposit growth, we reduced brokered deposits. The net effect was effectively flat total deposits on a linked quarter basis.

Speaker 3

When combined, transactional and low cost long duration healthcare financial services deposits compromised 46 percent of our deposit base. Our DDA balances were down $520,000,000 relative to the prior quarter. 2 thirds of the decline was driven by clients moving excess cash balances to higher yielding money market accounts, with the other third related to specific client transaction activity. Our total cost of deposits was up just 8 basis points to 223 basis points this quarter as the pace of deposit repricing continues to slow. For the month of March, our deposit cost was 224 basis points.

Speaker 3

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 roll forward our deposit beta assumptions to incorporate the Q2 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 $18,000,000 relative to prior quarter.

Speaker 3

Net interest income was down $3,000,000 from prior quarter. This was a result of higher funding costs and lower day count, partially offset by higher earning asset yields. Adjusted non interest income was up 17,000,000 dollars Adjusted expenses were up $22,000,000 and the provision increased 9,500,000 dollars Excluding adjustments, our tax rate was 20.7% this quarter, up from 19.5% in the 4th quarter. Our efficiency ratio was 45%. On Slide 12, we highlight net interest income, which declined $3,000,000 or 0.6 percent linked quarter.

Speaker 3

The decline was related to lower net interest margin and day count. The net interest margin was down 7 basis points to 3 35 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 $11,000,000 in costs this quarter versus $9,000,000 last quarter. As John highlighted, NIM was below our expectations as the macro environment made it challenging to grow a higher spread assets that meet our risk criteria.

Speaker 3

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 $388,000,000 of securities in the Q1. This will improve our securities yield by 4 basis points in the Q2. Pace of deposit repricing continues to moderate and was up just 8 basis points. Total liability costs were up 11 basis points.

Speaker 3

We have provided detail on our hedging program on Slide 27 in the supplement to this presentation, which reviews the bank's asset sensitivity. On Slide 13, we highlight non interest income, which was up $17,000,000 versus prior quarter on an adjusted basis. Dollars 11,000,000 of the increase was driven by our Healthcare Financial Services segment with $6,000,000 driven by the seasonal increases in growth in HSA Bank and $5,000,000 due to the addition of the Dimitros. An additional $5,000,000 of the increase was attributed to non cash swing in the credit valuation adjustment. Remaining drivers were related to BOLI events, commercial loan and other deposit fees.

Speaker 3

Non interest expense is on Slide 14. We reported adjusted expenses of $321,000,000 up $22,000,000 from the prior quarter. Dollars 10,000,000 of the increase came from Healthcare Financial Services with $7,000,000 driven by Ametros operating expense and intangibles and $3,000,000 due to seasonality and account growth at HSA Bank. Remaining growth in expenses were related to seasonal increases in payroll 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.

Speaker 3

After recording $37,000,000 in net charge offs, we incurred a $43,000,000 loan provision. Of which $38,000,000 was attributable to macro and credit factors and $5,000,000 of which was attributable to loan growth. As a result, our allowance coverage to loans increased to 126 basis points from 125 basis points last quarter. Slide 16 highlights our key asset quality metrics. On the upper left, non performing assets increased $70,000,000 relative to prior quarter with non performing loans now representing 56 basis points of total loans.

Speaker 3

Commercial classified loans as a percent of commercial loans increased to 224 basis points from 182 basis points as classified loans increased by $183,000,000 on an absolute basis. Classified loan increase was concentrated in C and 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 $37,000,000 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.

Speaker 3

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 Mitros, which closed in January and directly impacts deposits, interest income, fees and expenses.

Speaker 3

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 and I relative to CRE categories. We are reiterating our deposit growth in the 5% to 7% range with growth in the commercial bank full relationship deposits, retail deposits, interlink, amitros and corporate deposits. We expect net interest income of roughly $2,400,000,000 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 $65,000,000 to the outlook.

Speaker 3

Our net interest income assumes 2 decreases to the Fed funds rate, with 1 in September and the other in December. Non interest income continues to be forecasted in the range of $375,000,000 to 400,000,000 dollars Adjusted expenses continue to be in the range of $1,300,000,000 to $1,325,000,000 Our efficiency ratio is expected to be in the low to mid 40% range. We expect the effective tax rate of 21%. Of course, we will remain prudent managers of capital. Our long term common equity Tier 1 ratio remains at 10.5%.

Speaker 3

With that, I'll turn it over back to John for closing remarks.

Speaker 2

Thanks, Glenn. To follow-up on one point in our outlook, while we have maintained our longer term 10.5 percent 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 the commercial real estate relative to our total capital level should decline. Over the next 4 to 6 quarters, our intent is to bring CRE concentration to approximately 2 50% of Tier 1 capital plus reserves with a longer term target closer to 200% as we approach the $100,000,000,000 asset size threshold.

Speaker 2

There are many more industry headwinds than 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 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.

Speaker 2

Finally, as you're all aware, Glenn recently informed me and our Board of Directors of his intent to retire. We kicked off a comprehensive search for his successor in partnership with Spencer Stuart. There's been broad interest in the role and we are confident that we will find a terrific person to fill some big shoes. Glenn will in all likelihood be with us for at least the next earnings call, so I'll save my farewell remarks for July. As all of you know, Glenn has been an invaluable asset to me and to the bank for more than a decade and he has shined over the last 5 years through a pandemic, a transformational merger and the industry events of last March.

Speaker 2

Thank you all for joining us today. And Eric, Glenn and I will open the line for questions.

Operator

Your first question comes from the line of Matthew Breese with Stephens. Please go ahead. Hey, good morning, everybody.

Speaker 2

Good morning, Matt.

Speaker 4

I was hoping to start just on the NIM and NII. If I look at where we are this quarter versus the guide, it suggests that at some point this year kind of a material snapback in the overall quarterly cadence of NII.

Speaker 5

So I was

Speaker 4

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 NIM basis? Thank you.

Speaker 3

Yes. So let me start. Then John, you could 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 toward 5% loan growth.

Speaker 3

So if you think about on average, you're probably talking about $1,400,000,000 to $1,500,000,000 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 4th quarter and the add that we did in the Q4 of $1,100,000 as well as the restructuring we did in the Q1. We continue to see opportunity in the securities portfolio on cash flow basis where we'll have probably about $500,000,000 a quarter that will reprice. We'll probably pick up 300 basis points on that.

Speaker 3

And then likewise on the fixed rate loan portfolio, although it was somewhat softer in the Q1, we think that we'll probably get about $800,000,000 a quarter on the fixed rate loan portfolio. We'll 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, you saw in the Q1, creeped up by 8 basis points.

Speaker 3

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. And so that will detract from some of the gain that we get on both the loan growth, the investment and the repricing of fixed rate assets.

Speaker 2

Yes, Matt, I mean, I would just say, obviously, we're trying desperately not to overpromise and under deliver. That's not our style over 7 years. The Q1 was interesting in that we had back ended loan growth. We had very little loan growth in sponsor and specialty. We're starting to see some more activity there.

Speaker 2

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 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 the metros 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 $2,400,000,000 If dynamics continue to change, wildcard on prepayments and other things, obviously, we'll mix up

Speaker 3

the guidance, but it's our best view right

Speaker 2

now, quite frankly. So,

Speaker 4

credit. All in all, the credit metrics look pretty solid still, but 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 common threads, particularly in the C and I book. And then John, you had mentioned kind of getting to a 200% CRE concentration over time. Does something similar hold true for the reserve, which looks a little light versus your $100,000,000,000 bank peers as well?

Speaker 2

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 percentage increase in classified and non accruals looked high.

Speaker 2

But if you look at our absolute numbers, they're still below what Webster Bank reported pre pandemic at twelvethirty onetwenty 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 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 non performers actually skewing a little bit more towards C and I than CRE. I think we've been really out in front on CRE.

Speaker 2

But the only way I could characterize, I would say there's a the only industry segment that we have seen some negative trending in is Healthcare 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, healthcare 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.

Speaker 2

So we're not sounding the alarm everywhere. Jason is doing a terrific job of doing deep dives. So I really kind of just think it's a broad deterioration consistent what you're seeing throughout the industry. With respect to the CRE concentration, I think your calculation, Matt, what you do, you have us in the $2.80 to $2.85 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.

Speaker 2

So we're getting better yields and better structure. But if you see us accrete capital back that we lost in the Mitros acquisition and you see us managing that, the 6 quarter 250 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.

Speaker 2

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.

Operator

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

Speaker 5

Hey, good morning.

Operator

Hey, Chris.

Speaker 2

Hey, 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.

Speaker 2

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 liquidated charge offs. They happened. They weren't related to asset sales. So I do think that there's more pressure on credit.

Speaker 2

I think anything below 40 basis points in terms of cycle, 40 basis points, 50 basis points in commercial is 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 is kind of what we're building in even looking at our risk rating migration and our classified assets and our non accruals and 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.

Speaker 2

Could it go higher in any 1 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 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.

Speaker 2

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.

Speaker 2

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

Speaker 2

I think it's just an economic exercise. 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 non strategic loans that may have good market value and easily salable, we obviously have some levers to pull.

Speaker 2

We could have in this quarter done that. We just didn't think the economics made sense because there wasn't poor credit quality. It was just a question of kind of the earnings and the yields on those loans. So I think my short answer would be yes, as we execute that repositioning and we move forward and we don't want to jolt 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.

Speaker 6

Great. Thanks, John.

Speaker 2

Thank you.

Operator

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

Speaker 7

Hey, guys. Good morning. And 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?

Speaker 3

It's not really. So we have one cut in September December right now. And I think the difference, Mark, if I just kept it flat, is a total of $4,000,000 So it's not really relevant.

Speaker 7

Okay, great. And then secondly, on the office book, it looks like you've got about $260,000,000 of office loan maturities this year. I guess I'm curious, did the borrowers have anywhere else to go or 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?

Speaker 2

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 in the classifieds for us.

Speaker 2

We've done a really good job of taking the book down from $1,700,000,000 to $1,000,000,000 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 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.

Speaker 2

So we had a couple of payoffs, 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.

Speaker 2

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 percent 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.

Speaker 2

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.

Speaker 2

And despite the precipitous drop in valuation that you're reading about and

Operator

we see some of

Speaker 2

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

Speaker 5

forward. Thank you.

Speaker 2

Thanks, Mark.

Operator

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

Speaker 8

Hey, good morning, everyone.

Speaker 2

Hey, Steve.

Speaker 8

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

Speaker 2

Good question. So I think if you look at the Q1, we had 1.2% loan growth, which is in line with that 5%. And you're right, Q1 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.

Speaker 2

I think as we go forward, our sponsor and specialty book, Steve, which as you know has been kind of a crown jewel of ours and as we've seen the beginnings of green shoots and pipeline build there, but it's been slower activity in that sponsor space. And so I think that was one reason. We talked just a second ago with Matt about commercial real estate and the fact that we're going to be a little bit more selective and careful as we move forward in that segment, both with respect to the kind of inherent risks and the optics of our concentration levels there. And what I would say is definitely things getting better. I think the second half could be good.

Speaker 2

Could we outperform on the 5%? Yes. But as I mentioned earlier, we don't like to overpromise and underdeliver. 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.

Speaker 2

I'm hoping that we can outperform that. We're seeing better pipelines. We're not seeing as robust pipelines, but I think there's reason to be optimistic for the second half.

Speaker 8

Got it. Okay. And then thanks. 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 the wholesale funding, etcetera. For you, Glenn, do you think this is a bottom for the margin this quarter?

Speaker 8

And how do you think about NIM trending before we get any rate cuts and then maybe if we do get rate cuts? Thanks.

Speaker 3

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, 3.35% will probably be relatively flat. I do on 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.

Speaker 3

So you can think of a full year average margin somewhere around 3.41%, 3.42% if you just look at the full year.

Speaker 8

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

Speaker 3

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 $60,000,000,000 in deposits, about 20% are sort of had the same characteristic of InterLink. So they reprice pretty quickly. So those are things like public funds.

Speaker 3

Those are things like InterLink. And there's some other products there. So you can think about $12,000,000,000 that I would consider sort of high beta products right now, but then they reprice down pretty quickly. So that would be the 1st tranche to go when the Fed cuts. We think that the deposit beta on the way down is 20, say 20% -plus on the way down.

Speaker 3

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 their 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 $2,200,000,000 come due in the Q1. That repriced higher by 43 basis points. As I look forward, there's another $2,000,000,000 in the second, another $2,000,000,000 in the third quarter.

Speaker 3

Those are going to be neutral by the 3rd 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 the second quarter.

Speaker 8

Okay, got it. Thanks for taking my questions.

Speaker 2

Thanks, Steve.

Operator

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

Speaker 2

Great. Thanks. Good morning, everyone.

Speaker 9

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. I'm just wondering if that is conservative or just some color on what's the expense pressure there for the midpoint of the guide?

Speaker 2

Yes. Thanks, Casey. I think you're right. We got a full year of the full quarter of the metros moving forward. So it just annualized.

Speaker 2

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 $100,000,000,000 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 $50,000,000,000 to $100,000,000,000 category. And we think that low starting point of efficiency gives us some flexibility.

Speaker 2

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 incessantly 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 help 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.

Speaker 2

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.

Speaker 9

Got it. Thanks. And then just wanted to circle back on the loan growth. So if I'm understanding you correctly, CRE is going to run-in place. The loan pipeline sounds okay, but CRE drove a ton of the growth this quarter.

Speaker 9

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 and what buckets you're looking to grow to pick up the slack for CRE?

Speaker 2

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 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 the 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.

Speaker 2

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 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 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.

Speaker 2

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.

Speaker 2

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, a really helping NIM at 335. We've got a 45% efficiency ratio, a 1.25% ROA and 18% ROA. 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.

Speaker 2

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 freeze Cree and we're going to still have 5% loan growth. I think you're going to see Cree 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.

Speaker 5

Great. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 6

Hey, good morning. Maybe just switching over to deposits with DDA balances declining this quarter. Do you think that we're near the bottom here? 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?

Speaker 3

Yes. So let me so hi, Jared, it's Glenn. So I think we did see an acceleration in the Q1 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 Q2 at $10,500,000,000 on DDA that's basically flattened out for the year.

Speaker 3

As far as growth, the drivers and the guidance suggests $3,000,000,000 to $4,000,000,000 in deposit growth at the low and high range. So some of the key drivers are going to be a Mitros obviously, so say $100,000,000 on the low end, dollars 150,000,000 on the high end. HSA, between $200,000,000 $500,000,000 over on the course of the year. InterLink, I would probably say about $1,400,000,000 will grow between now and the end of the year. We still continue to see CD growth.

Speaker 3

We saw $300,000,000 in the quarter. I think for the full year, we're thinking it's probably about $500,000,000 And then the rest of that would be probably in wholesale funding or wholesale the wholesale channels.

Speaker 6

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

Speaker 6

Yes.

Speaker 3

So that's driven by primarily by rates. So that you saw the reduction last quarter as rates from the 3rd to the 4th quarter came down. And then you see it from the Q4 to Q1 sort of a snap back on that. So that's it's pretty much driven by rates. These are this is the valuation this is the valuation part of our customer derivative book, right?

Speaker 3

And so there's been some noise back and forth over the last couple of quarters. It's hard to forecast that you can tie it to rates and I would say if rates are stable right now, you'd probably expect it to be relatively stable. As rates go down, it could have a little bit of a hit, but not nothing like we saw from the 3rd to the 4th quarter where it was $4,300,000 from memory.

Speaker 6

Okay, great. Thanks for that and congratulations on the retirement. Looking forward to still talking to you over the next quarter or so.

Speaker 3

Thanks, Sharon.

Operator

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

Speaker 5

Hey, good morning. Good morning. Given the comments on capital and eventually moving that CRE to Tier 1 plus reserve number lower than even 2 50%. Does that mean that buybacks are off the table for the foreseeable future? Or do you think you can restart once you get to that 11% CET1 level?

Speaker 5

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?

Speaker 2

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 20 24 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.

Speaker 2

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 an M and A perspective, we're not really focused at all on inorganic growth right now. We would love to do more transactions like the Imitros 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.

Speaker 5

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-twenty 19? And are there any details that you can share on that portfolio?

Speaker 2

Yes. Those are really small generally, as we said, granular small balance accounts average $3,500,000 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.

Speaker 2

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 fed us well. It doesn't mean that higher NOI, 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.

Speaker 5

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

Speaker 2

No, we haven't seen it.

Speaker 5

Great. Thank you.

Operator

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

Speaker 10

Thank you. Good morning, guys. Maybe first just changing gears here, looking at the fee income guide. Just curious if there's something in the 97,500,000 core number that you did in the Q1 that you expect to moderate or you think that that's a decent number to grow off of in 2024?

Speaker 3

Yes. So I think on that, we were I think we still feel good, like I said in the guidance of $375,000,000 to 400,000,000 dollars We did have a strong quarter. I think the guidance implies a range of $92,000,000 to 100,000,000 dollars And some of the tailwinds, if I just sort of break it out, we still will get the benefit, the full year benefit of the metros, which will add say $1,500,000 to $2,000,000 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 Q1.

Speaker 3

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 $98,000,000 $99,000,000 range.

Speaker 10

Okay, great. Thanks, Glenn. Understood. And then maybe just a follow-up on the conversation on deposits. You mentioned you're budgeting for non interest bearing to stay relatively flat for the rest of the year.

Speaker 10

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 the void with additional funding via wholesale channels or would you you just curious how you would approach that scenario and if there's some kind of leverage you're working on?

Speaker 3

Yes, from a funding gap, the answer is yes. I mean, if you think on your loan growth, probably you get some additional mix and you'd probably see it move as we've seen in the past like money market deposits. So it definitely increases your costs. The other thing I'll point out, John, is that with the amitros and HSA, amitros 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.

Speaker 3

We closed at $800,000,000 We're already at $871,000,000 and it's just basically 2 months. 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'd probably use wholesale funding.

Speaker 3

The last thing I'd put on the metros by the way and it is in the slides is that in that business we have about $3,500,000,000 of committed funds in the future. So those are contractual settlements. So if you think of that business, there's $3,500,000,000 in a pipeline that's over years years, but it's that's the committed funds to that business. And I think that represents a pretty significant opportunity for us.

Speaker 2

Yes. And I would just again, I think I'm probably saying the same thing Glenn said, but what we saw in the Q1 was less DDAs out creating funding holes, but DDAs to higher yielding accounts internally. So we didn't really it didn't create a funding hole. It was just unfortunately higher cost deposits.

Speaker 10

Okay, great. Thanks for all the color. Appreciate it, guys.

Operator

Your next question comes from the line of Bernie Von Gazzicchi with Deutsche Bank. Please go ahead.

Speaker 11

Hey, guys. Good morning. John, in the beginning of the call, you noted you expect an ROA of 1.3% and RODC 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?

Speaker 11

And if you can elaborate on any underlying macro assumptions behind that?

Speaker 2

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 precipitous change in Fed funds, unprecedented.

Speaker 2

We've seen banking crises. We've seen pressures on and kind of a 1.2 to a 1.4 ROA. Obviously, this quarter, it and kind of a 1.2 to a 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.

Speaker 2

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.

Speaker 11

Okay, great. Thank you for that. And just separately, I appreciate the additional CRE slides in the deck this quarter. In your latest 10 Q, I believe you disclosed the CRE office reserves of nearly 36,000,000 dollars Just wondering how is that tracking as of threethirty 1?

Speaker 2

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

Operator

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

Speaker 12

Yes. Hi. Thanks. Good morning. And Glenn, I just want to say congrats.

Speaker 12

Just if we could jump back to C and I, that's where you had a big jump in non performers. Can you help us think about going from $135,000,000 to $204,000,000 in non performers in the quarter? Where we're seeing that jump? Any details? Is it sponsor and specialty finance?

Speaker 12

Is it ABL? How much is next? Any color you can share with us there? Thanks.

Speaker 2

Yes, Laurie, I will try. We've at a company our size, we certainly don't talk about specific credits, but there were say 4 credits in the C and I. We had a contractor, healthcare services, a food and restaurant company, 1 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.

Speaker 2

So if I told you they were 5 sponsored 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 and I and 1 CRE deal. And again, I think the critical element is that our non accrual loans, if you look at peers that have reported so far or you look at Webster's non accrual levels pre pandemic, we still haven't approached the benign credit environment level there. And I'm not pretending that we won't because I said we'll continue to have pressure. But nothing we've seen has suggested that there's a pocket of weakness for underwriting asset class business line or geography that has us particularly concerned, we're really reviewing the whole portfolio.

Speaker 2

So I would say it's idiosyncratic across industries, across sectors and business lines in the quarter and a move back to a more normal level of non performers.

Speaker 12

Got it. And then just especially the sponsor and specialty book, how much is that nonperforming?

Speaker 2

Wait, can you repeat the question?

Speaker 12

Yes. The sponsor and specialty book, what is the non performing rate there or dollar amount there, the $6,700,000,000 book?

Speaker 2

About 2 percent? About 2%.

Speaker 12

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 Ametrius acquisition, you would probably be paying that down, that's costing 5.5%.

Speaker 12

Can you just share with us, I guess, what you're thinking there? Thank you very much.

Speaker 3

So the spot NIM at the end of the quarter was exactly where we worked for the full quarter, so say 3.35%. Spot deposit costs, I said on the call, 2.24%, so up one basis point from where

Speaker 8

we were for the quarter.

Speaker 3

And loans down 2 basis points, so 6.22. 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 be a little more flexible than lining up brokered CDs, the terms and stuff like that. And so we can tap that resource in order to fund any shortfalls and things like that. So I think that's the way I would think about it.

Operator

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.

Speaker 2

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

Operator

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

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