Good morning. Welcome to the Webster Financial Corporation Fourth Quarter 2023 Earnings Conference Call. Please note that 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 one question and one 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're 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, a highly efficient operating model, and a 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 remains 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 back-loaded, 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. The 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 from medical claims settlements via a proprietary technology platform and service teams. A large majority of the claims Ametros administers 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 are 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 five 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 unchanged from the 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 non-existent. 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 will 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 components of the adjustments were a $47 million FDIC special assessment, $31 million in merger-related expense, and a $17 million loss from securities repositioning. 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 increased by $1.5 billion from the third quarter, with $400 million of the increase attributed to the value appreciation of our AFS portfolio and the remaining $1.1 billion reflecting actions 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 earlier, we also repositioned roughly $400 million of our securities portfolio, expecting less than one year to earn back. This should result in a benefit of 3 basis points to our net interest margin in the first quarter. Loans increased by $640 million, primarily driven by commercial categories. Most of the growth occurred late in the quarter, resulting in a period-end balance that was $375 million higher than average. Deposits grew by $450 million in the quarter, with 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 remained strong. Our 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, reflecting nearly a 10% increase quarter-over-quarter due to earnings and the improvement in AOCI. In a steady interest-rate environment, we anticipate $75 million in unrealized security losses to accrete back into capital annually. Loan trends are highlighted on Slide 9. In total, loans increased by roughly $650 million or 1.3% on a linked-quarter basis. The Commercial Bank continues to drive loan trends with growth in the C&I and commercial real estate portfolios. Much of the growth was in low-risk, lower-yielding portfolios, with C&I growth primarily in fund banking, public sector finance, and business banking. Commercial real estate growth was seen in stronger risk-rated portfolios, including multifamily. Notably, we reduced remaining balances in mortgage warehouse. The yield on the loan portfolio increased by 4 basis points, with floating and periodic loans comprising 59% of total loans at the quarter’s end. We provide additional details on deposits on Slide 10. Total deposits rose by $450 million from the prior quarter, an increase of 0.7%. We saw growth in all major deposit product categories except for demand and money market accounts, which were affected by seasonality in public funds. Our total deposit costs rose by 19 basis points to 215 basis points, resulting in a cumulative cycle-to-date total deposit beta of 40%. On Slide 11, we revised our deposit beta assumptions for the first quarter, expecting our beta to reach 41%. Moving to Slide 12, we compare our reported to adjusted income statement with our adjusted earnings from the prior period. Overall, adjusted net income decreased by $17 million relative to the prior quarter. Net interest income fell by $16 million due to anticipated balance sheet growth being achieved later in the quarter and the continued run-off of non-strategic loans. Adjusted non-interest income decreased by $10 million, mainly driven by a non-cash swing in our modeled credit valuation adjustment on customer derivatives. Partially offsetting these trends, expenses decreased by $1.6 million, and provisions fell by $0.5 million. We also experienced a lower tax rate of 19.5% this quarter, down from 20.1% in the third quarter due to state and local true-ups. Our efficiency ratio was 43%. On Slide 13, we note that net interest income declined by $16 million linked-quarter, influenced by later-than-expected growth in our earning assets and the runoff of non-strategic portfolios. The net interest margin decreased by 7 basis points from the prior quarter to 3.42%. Due to the timing of our fourth-quarter growth in earning assets and forecasted originations in the first quarter, we expect to grow both net interest income and NIM going into the first quarter. Our yield on earning assets increased by 5 basis points over the previous quarter. The pace of deposit pricing moderated to 19 basis points, while the cost of total interest-bearing liabilities rose by 14 basis points, driven by a periodic change in deposit mix, primarily due to the seasonal decline in public funds, coupled with growth in higher-yielding deposit categories and wholesale funding. On Slide 14, we highlight non-interest income, which decreased by $10 million relative to the prior quarter on an adjusted basis. Of this decline, $8 million was attributable to a non-cash swing in the modeled credit valuation adjustment on customer derivatives, resulting in a $4 million charge this quarter compared to a $4 million benefit last quarter. We also observed a seasonal decline in HSA interchange fees, while transaction activity tied to commercial clients remained slow in the fourth quarter. Non-interest expense is detailed on Slide 15. We reported adjusted expenses of $299 million, a decline of $2 million from the prior quarter. Reductions in recurring expenses, FDIC insurance, and technology costs were partially offset by increased marketing and employee benefit costs. Slide 16 outlines the components of our allowance for credit losses, which remained effectively flat compared to the prior quarter. After recording $34 million in net charge-offs, we incurred a $34 million provision, $26 million of which was due to macro and credit factors, and $8 million was tied to loan growth. Consequently, our allowance coverage to loans modestly decreased to 125 basis points from 127 basis points last quarter, partly reflecting the shift in mix to loans with lower loss content. Slide 17 highlights our key asset quality metrics. Non-performing assets remained flat compared to the prior quarter and increased slightly compared to the prior year, with non-performing loans representing just 41 basis points of total loans. The percentage of commercial loans classified increased to 182 basis points from 174 basis points, with classified loans growing by $44 million. Net charge-offs amounted to $34 million, or 27 basis points of average loans on an annualized basis. We divested another $51 million of commercial loans and $21 million of residential loans during the quarter, resulting in $14 million of the $34 million in net charge-offs. Slide 18 shows that we maintain strong capital levels, with all capital levels exceeding regulatory and internal targets. Our common equity Tier 1 ratio was 11.12%, and our tangible common equity ratio was 7.7%, with tangible book value at $32.39 per share. I'll conclude my comments on Slide 19 with our outlook for 2024. Our outlook includes the pro-forma impact of Ametros, which directly affects deposits, net interest income, fees, and expenses. We expect loans to grow in the range of 5% to 7%, continuing to be driven by our commercial businesses. Deposits are also expected to grow by 5% to 7%. We project net interest income to range from $2.4 billion to $2.45 billion on a non-FTE basis. For those modeling net interest income on an FTE basis, I suggest adding about $75 million to the outlook. Our net interest income outlook assumes four decreases in the Fed funds rate starting in May. Non-interest income is forecasted to be between $375 million and $400 million, including approximately $25 million in fees generated by Ametros. Expenses are projected to be between $1.3 billion and $1.325 billion, which includes roughly $50 million due to the addition of Ametros, covering both operating costs and estimated intangible amortization. We expect our efficiency ratio to be in the low-to-mid 40% range and our effective tax rate to be 21%. We will continue to manage capital prudently, targeting a common equity Tier 1 ratio of around 10.5%. With Ametros expected to close soon, we plan to rebuild capital in the near term, after which we aim to utilize roughly 40% of our earnings per share for repurchases and acquisitions similar to those we have announced in recent years. With that, I'll hand 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 provide us with a great opportunity to grow the company in strategically compelling areas. We will 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 two-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 invaluable over the past two 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. While 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.

Your first question comes from Mark Fitzgibbon from Piper Sandler. Please go ahead, your line is open.

Hey, guys. Good morning.

Good morning, Mark.

First question I had, Glenn, based on where yields are today, do you plan to continue to grow and extend the securities book in the first quarter to sort of further reduce asset sensitivity?

We added about $1.1 billion in securities at the end of the fourth quarter, which I believe positions us well for the next few quarters. We made this move opportunistically in a favorable rate environment and are pleased with it. Our main goal was to further reduce our asset sensitivity.

But, Glenn, do you plan to continue to do that in the first quarter?

Yeah, I mean, it'll be not to the extent that it's $1 billion but it will be at a smaller level, and we'll 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.

Thank you.

Thank you.

Your next question comes from the line of Matt Breese from Stephens. Please go ahead, your line is open.

Hey, good morning.

Good morning.

I was hoping we could touch on loan yields. Expansion was a bit less than I was expecting this quarter, up 4 bps to 6.24%. And 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?

In the fourth quarter, our commercial loan yields were 7.60% for loans originated during that period, and total loans were in the same range, around 7.58%.

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. 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 yielding. 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 to recapture that?

Yeah, it's a great question, and 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 the bank in the bank space, it's the maximum 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.

Yeah, primarily, yes.

All right. I'll leave it there. Thank you.

Great.

Your next question comes from the line of Chris McGratty from KBW. Please go ahead, your line is open.

Hey, good morning.

Hey, Chris.

Hey, John. Hey, Glenn. 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 two-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?

Yeah, 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.

Yeah, that's exactly right. Because 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.

Great. Regarding the NII guide, it seems your outlook aligns closely with ours, which suggests fewer cuts in the futures market. If we were to see five or six cuts by 2024, how would that affect your NII outlook compared to what you shared?

If we were to have six cuts and we currently have four cuts, it wouldn't be very significant for us. We do have some hedges that would take effect, but I would estimate the potential downside to be in the range of $15 million to $20 million. So, overall, it's not that significant.

Okay. And that $15 million to $20 million is for 2024, given the cadence...

In 2024, if we consider both the lower and upper ends of our guidance and assume six cuts, it would likely result in a reduction of approximately $15 million to $20 million.

All right. Thank you.

Sure.

Thanks, Chris.

Your next question comes from the line of Casey Haire from Jefferies. Please go ahead, your line is open.

Yeah, great. Thanks. Good morning, everyone.

Good morning, Casey.

Good morning. So, Glenn, just following up on another one on the NII guide. So looking at Slide 11, giving us the cum beta in the first quarter to 41%, I was wondering if you could give us the progression throughout the year. Where does that cum beta peak in the tightening cycle? And then how does it progress after you get these four cuts beginning in May?

I believe it will remain around 41%, plus or minus. The key factor here will be how we reprice deposits. In our portfolio of $60 billion, approximately 20%, or about $12 million, consists of high beta deposits that have immediate sensitivity. As the Fed makes changes, Ametros serves as a prime example, accounting for nearly $6 billion of that.

I'm sorry, interLINK.

I'm sorry, interLINK, right? And 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 deposit. So I look at our deposit book, it's about 20%. So it's, say, $12 billion or $13 billion of our $60 billion. So that'll be a benefit for us, right? So I think it'll probably end up around in that 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'll help offset some of it as well.

Got you. Thank you.

Ametros will lower our beta since we are bringing in $800 million at a few basis points, and that is expected to grow by 25% each year.

Got you. Okay. And then just following up on the fee and expense guide, it suggests a significant increase from the current run rate. I know Ametros is on the rise here. Could you clarify what portion is organic or from legacy Webster? And what does Ametros contribute? This will help us understand the ramp-up better.

Sure. Core expenses were approximately $1.2 billion in 2023. For 2024, the guidance is set between $1.3 billion and $1.325 billion. In simple terms, this indicates an increase of about $100 million to $125 million. If we break this down, roughly $50 million is related to Ametros, which covers the operating costs for 150 employees, the technology platform, and intangible amortization. About $50 million of the remaining amount is associated with performance-based compensation, specifically around $20 million for performance-based compensation and another $40 million targeted at investments in revenue-generating business lines. So in summary, the $50 million is for Ametros, $20 million is for performance-based compensation, and $40 million is for business investments.

And then the fees, he asked.

And then regarding fees, on non-interest income, we are expecting core net interest income to be $348 million for 2023, with a projection of $375 million to $400 million. This indicates a year-over-year growth of $25 million to $50 million, with approximately $25 million of that related to Ametros, which includes a combination of account administration fees, pharmacy fees, and other types of transactional rebate fees. The remaining growth is attributed to several categories like HSA interchange, which is increasing by $4 million to $5 million, commercial lending fees, including swaps and syndication, which are projected to rise by $3 million to $5 million, trust and investment fees, along with some smaller cash management fees. This outlines the overall picture.

And, Casey, to clarify expenses, it seems like a large overall figure. However, as Glenn mentioned, a significant portion of the increase in guided expenses is connected to the Ametros acquisition. Some of these expenses are operational costs while others pertain to the amortization of intangible assets. Additionally, there has been a year-over-year increase in performance-based compensation expectations, which is consistent with trends across the industry. If we examine further, the remaining rise in core expenses is approximately 4%, slightly below that, and is related to investments in teams, projects, and technology. Even if we implement all these initiatives according to our expectations, we anticipate remaining in the low to mid 40% range in terms of efficiency, which is distinctive for us, allowing us to remain proactive and continue investing in revenue growth and declining rates. We also have the flexibility to adjust the timing of certain investments and reduce expenses if needed, should our net interest income or fees exceed expectations. Overall, I feel optimistic about our position relative to the financial metrics we've committed to over time, based on the guidance provided. It’s important to note that a substantial part of the headline expense figure is non-organic due to the acquisition, with the remainder being related to performance and investments in new revenue opportunities.

Yeah. Thanks for breaking it out.

Your next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead, your line is open.

Hi, good morning.

Good morning.

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 higher end of that range?

That's an excellent question. We acknowledge that our guidance of 5% to 7% is at the higher end of market expectations. The positive aspect from our perspective is that we are closely monitoring our pipeline, clients, markets, and sectors we operate in. I want to emphasize that we are not making these projections based on hope for improved market conditions. Initially, we anticipated more robust loan growth than this, and we believe there are significant opportunities ahead. We've reviewed our commercial pipeline, and most of the loan growth is expected to come from commercial categories, including non-office commercial real estate, public sector finance, sponsor and specialty financing, and general commercial and industrial funding. We also have strong capabilities in equipment financing and asset-based lending. However, the core areas where we see growth will be in those commercial sectors. Additionally, after discussions with our head of commercial banking and examining our future pipeline, we note that while overall loan demand remains subdued, we’re observing increased asset trading and transactional activity. For Webster, this translates to more engagement from real estate investors and private equity sponsors who are becoming more active in buying and selling assets or companies. As we move into the first quarter, our pipeline has grown significantly, and we’ll provide updates each quarter. Currently, we feel confident that achieving the low end of our 5% goal is feasible without excessive risk, while continuing to operate within our underwriting standards and existing strategies regarding market segments and geography.

Very helpful. And then if you can 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 could 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 seeing any decline in non-office commercial real estate, and we seem to be managing maturities effectively, with sponsors and owners staying connected to their loans. There hasn't been any significant deterioration in that area. I believe the characterization of the quarter as relatively unchanged from the previous one is accurate. We did have a few loans in commercial and industrial go into classified status, but we also slightly reduced our non-performing loans. Overall, the credit profile remains stable. I've been surprised, like many others, that there's been no capitulation in certain sectors, as we continue to see strong resilience in consumer behavior. We're not facing any issues with delinquencies in our home equity and mortgage loans. In the commercial and industrial space, people have shown resilience, and some investment is still taking place. We're focusing on areas like sponsors and specialty healthcare services, which face secular pressures and contracting, usually linked to cyclical trends. However, we've done a good job of proactively avoiding certain sectors or quickly addressing issues. Notably, we've also reduced our office exposure by almost $700 million over the last five or six quarters without material losses. The overall credit risk rating migration in our portfolio remains modestly downward, but due to proactive risk management, we're not observing any significant stress areas. If you look at charge-off numbers, we've ended the year at about 22 basis points, which is consistent with the five-year average before the pandemic. This illustrates where our credit performance stands now compared to pre-pandemic levels. Out of that 22 basis points, 10 basis points relate to proactive balance sheet management and loan sales. We haven't experienced the anticipated credit wave, but we're continuing to monitor the situation closely.

Appreciate all the detail. Thank you.

Your next question comes from the line of Daniel Tamayo from Raymond James. Please go ahead, your line is open.

Hey, thanks, guys. Good morning, everybody.

Hey, Daniel.

Just a quick one. Almost all my questions have been asked this point. But I guess to put a finer point on the intangible 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?

What I would say is we said expenses would be about $50 million, and I would say about half of that is going to be intangible amortization.

Okay, great. That's all I had. Thanks, guys.

Thanks, Dan.

Your next question comes from the line of Steven Alexopoulos from JP Morgan. Please go ahead, your line is open.

Hey, good morning, everyone.

Hey, Steve.

I want us to go back to the margin for you, Glenn. So the NIM at 3.42% 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, but 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?

Thank you, Steve. I believe that the 3.42% mark is quite unusual for us considering the loan originations we've seen. John mentioned over $1 billion in loan and securities originations by the end of the quarter, which we will fully benefit from entering the first quarter. Additionally, with Ametros, we anticipate at least $800 million in incoming funds, allowing us to pay down FHLB borrowings at 5.25%, providing immediate benefits that will extend throughout the year, supporting our net interest margin (NIM). We continue to face the situation where fixed-rate loans are repricing, and we are looking at around $1 billion to $1.2 billion in fixed-rate loans repricing in certain quarters. Repricing to new fixed-rate loans could yield an additional 200 basis points, further enhancing NIM. The securities purchases at the end of the quarter will provide a full year’s benefit as well. Regarding our restructuring of $400 million, we likely gained about 400 basis points from that effort. All these factors contribute positively to NIM. I expect NIM to remain supported in the first few quarters and continue through the year. Being asset-sensitive means that as the Fed begins reducing rates in the latter half of the year, deposit costs will eventually trend downwards, though there will be an initial lag. Given all these variables, I anticipate NIM to be around 3.45%, with potential for upside based on how the balance sheet evolves.

Yeah. And Steve, I think you have the dynamic 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 your update there?

Sure. I'll provide a brief answer about the short-term outlook for HSA bank. Its importance to us remains significant, even though its financial contribution is somewhat smaller given the growth of our organization. HSA bank is crucial for us in terms of revenue, fees, and as a low-cost, long-term deposit source. I want to clarify that there was a lot of speculation after our last call about our stance on HSA. For about six quarters, nobody asked about it, so when I provided an answer, some interpreted it as a change in perspective. However, we are not looking to sell HSA bank. With the acquisition of Ametros, we are confident in our unique capability as a bank to leverage diversified funding sources that generate fees effectively. While we haven't included potential cross-synergies in our forecasts, we are exploring unique business opportunities, including interLINK. It's important to emphasize that we are stewards of our shareholders' capital. We continuously evaluate all our business lines to maximize economic profit, whether that means keeping them wholly owned, entering joint ventures, or selling. While we are not selling HSA, we remain diligent in ensuring we do not overlook opportunities that could enhance shareholder value as we allocate capital and make decisions.

Got it. That's helpful color. John, if I could squeeze one more in and violate your two-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 a 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 at that, do you see no reason to slow growth? Like, you feel like you're very prepared? The proposed rules could change, but that's no reason to slow your growth in terms of trying to manage the timeline to get there. Just what gives you so much more confidence than some of your peers? Thanks.

That's a complex question. I believe we still have some distance to cover before reaching that threshold. We're dedicating significant efforts to analyze our three and five-year plans to ensure we're aligned with compliance and risk management requirements. We need to thoroughly understand the potential effects of the proposed rules on our capital, liquidity, and balance sheet structure. I believe we have enough flexibility within our growth asset classes to make prompt economic decisions, whether that's divesting or slowing growth. We are not under immediate pressure regarding our strategy over the next 18 to 24 months. We still have the capacity to serve our customers, support existing clients, and prepare for the possibility of reaching $100 billion. Therefore, we don't think this is the right moment to pull back on growth. However, we are strategically considering how our actions align with the potential $100 billion requirements. While my response may not fully satisfy your curiosity, rest assured that it is a topic we are actively evaluating, particularly regarding its implications for our future merger and acquisition strategies. We are discussing the best approach to navigate the $100 billion mark—whether to exceed it, stay below it, or find a balanced approach. We're positioning ourselves to take advantage of any of these strategies based on market conditions. Thus, I don’t believe we’re restricting ourselves by continuing to leverage our unique funding sources and origination channels to sustain our current growth rate.

Okay. Great. Thanks for taking my questions.

Thanks, Steve.

Your next question comes from the line of Brody Preston from UBS. Go ahead, your line is open.

Hey, good morning.

Good morning.

Hey, Glenn. I wanted to follow up on the securities purchases and restructuring with a couple of questions. The purchase yield this quarter was 6.79%. First, what are you buying? And second, considering the end of quarter purchases and the restructurings, what was the 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, Brody, during the quarter was MBS, and with it, say, a 3.8 year duration and a book yield of, say 5.80%, 5.85%. Does that answer that part?

Yeah, it does. Thank you.

Okay. And then the securities yield, I think it's indiscernible at 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 here.

Yeah. Reinvesting. Like, if you think of our securities portfolio that spins off about $300 million a quarter, we would reinvest that and roll it.

Okay, I understand. For my follow-up, I wanted to revisit Ametros and thank you for discussing the CDI expense. Regarding the 25% CAGR, it initially appears to be a rather ambitious growth target, especially from a banking perspective. Could you elaborate on why you believe that's the right target, setting synergies aside? Are there conservative areas within that guidance where you feel there could be organic outperformance even without synergies?

It's important to remember that we're starting from a relatively small base, and we have a wealth of historical data to consider. The management team is exceptional, and they've shown their ability to achieve results. We have a solid pipeline for growth that is becoming quite predictable, similar to HSA. They also maintain strong relationships with both account holders and the insurance companies they collaborate with. This gives us a clear view of growth potential from a small base moving forward, especially considering future contractor payments, which provide assurance about incoming revenue. We are confident that our projected growth range is reasonable. In terms of potential upside, I've touched on this in my previous comments. Currently, we haven't included any potential expansion into new product offerings with similar traits. The CEO is highly capable and has a clear strategy supported by capital investment, which positions them well to explore new markets. We haven’t calculated any synergies between account holders in our other businesses or cross-selling opportunities. The real opportunity lies in innovating new approaches to leverage growth. However, we are very confident in our baseline expectation of a 25% compound annual growth rate, as we believe we have a strong outlook for predictable growth over the next five years.

Got it. And if I could sneak one more in, just given the strength of the business on a standalone 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.

Yeah, 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 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.

Got it. Thank you very much for answering my questions, everyone.

Yeah.

Your next question comes from the line of Jon Arfstrom from RBC Capital Markets. Please go ahead, your line is open.

Thanks. Good morning. 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 or what the drivers were?

Yeah. 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-rated 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…

No, it's just timing and it varies from 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 completely aligned and we'll continue to be. And obviously, I'll continue to seek out his counsel even after he's 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 ROATC, 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.

Yeah. Okay, all right. Thank you.

Your next question comes from the line of Bernard von-Gizycki from Deutsche Bank. Please go ahead, your line is open.

Hi, guys. Good morning. Maybe just staying on Sterling, with integration now past you, there's been this discussion of 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?

We are seeing solid double-digit growth in areas like cash management cards and foreign exchange, which contribute to an increase in fees, although these are off a small base compared to our net interest income. However, these activities won't significantly impact our overall steady growth. We are focused on these areas and have already launched new capabilities for our clients, such as Ametros, which will positively contribute to fees this year. We are continually exploring potential opportunities in capital markets, syndication, and securitization, considering our strong origination capabilities to generate additional fee income and manage our balance sheet. While these ideas are on our radar for long-term growth in fee income, they are not currently included in our forecasts, and it's too early to provide any specific guidance on them.

Understood. I think last quarter, maybe just talking about the expense opportunities that still remain, I think you talked about consolidation of sub-ledgers, back office processes, and call center consolidation. Maybe could you help frame any of the remaining opportunity on this front?

Yeah, I think Glenn might comment, but I think that's sort of built into our overall net expense view. Some of the stuff is 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 have an estimate for what you think the full run rate of some of those opportunities are.

We expect to maintain an efficiency ratio in the mid to low 40% range. This provides us with some flexibility if market conditions become more challenging. More importantly, we are still working on consolidating our ledgers, which impacts reconciliations and related processes, but this also opens up opportunities for us to reinvest in the business. We believe we are performing at a best-in-class level with an efficiency ratio between 45% and the low to mid-40s. Therefore, if you're considering projections, I would recommend using that figure as a reference.

Okay, great. Thanks for the color, guys.

Thank you.

Your next question comes from the line of Ben Gerlinger from Citigroup. Please go ahead, your line is open.

Hey, good morning, guys. Was curious...

Hey, good morning, and welcome.

Appreciate it. Yeah. If we could just think about just the deposit franchises in general. I think Casey asked the question, you gave some deposit beta assumptions on your different niches. I'm just curious if the forward curve is correct or even just the four-cuts assumption. Are there any flow differences or what you might see in a deposit mix in general? I get that 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-ish bps going forward?

That's a great question. There are a few things that set us apart. We've discussed Ametros extensively. Additionally, we benefit from the HSA, which allows for enrollment in the first quarter, and we continue receiving funds throughout the year. We also have interLINK, providing us the flexibility to increase core deposits or manage our loan-to-deposit ratio accordingly. We're closely monitoring the flow of deposits, particularly with about $2 billion in CDs maturing in the first quarter and another similar amount in the second quarter. We're paying attention to how those funds roll over and to demand, as our pure DDA has slightly decreased. We've been around the $11 billion mark and believe there's potential for growth of about $200 million this year. Overall, I don't foresee anything major impacting us. We expect to see some deposits shift from low-interest money market and savings accounts to CDs, especially if clients anticipate rates dropping, leading them to extend their investments. These are the basic dynamics we're observing.

I agree with Glenn. I hope we are addressing your question about the initial 100 points decrease. I don't believe it will significantly alter the behaviors of customers and depositors or overall deposit flows between banks and non-banks.

Yeah.