Webster Financial Corporation (NYSE:WBS) Q1 2023 Earnings Call Transcript

Thanks, guys.John Ciulla Thank you.Operator Our next question comes from Matthew Breese from Stephens. Please go ahead. Your line is open.Matthew Breese Good morning. I wanted to touch on credit. First, could you just give us some sense on loan resets for commercial real estate, what is the average kind of change in loan yield for loans coming out of, I’d assume 2018, 2019 vintages to today? And what kind of impact does that have on debt service coverage ratios? And then the second question I have is just same type of profile, right, 2018 or 2019 vintages to today, what’s kind of the average change in cap rates that you’re using when you underwrite those properties? And how are borrowers behaving or reacting to these changes?John Ciulla Yes, it’s interesting.

It’s hard to give sort of a blanket response to that because what we’re seeing is maturities obviously, what we’re doing is we’re renegotiating with borrowers. They are putting in either more proceeds or rates are increasing if we’re taking a little bit more risk on the LTV and debt service coverage ratios, I’m trying to pull up some data I have around. I think we are a couple of hundred basis points up from a cap rate perspective. 6.2% was our kind of all-in yield. That’s probably up in March in commercial real estate. That’s probably up 250 basis points since the ‘18 and ‘19 range. And that’s kind of what we’re originating now. I’d say some of the research we have, Matt, shows that like if a 10% decline in NOI increases – I’m sorry, impacts DCR, about 17 basis points.

I’m trying to think of my LTV number that I had here, give me 1 second. A 100 basis point increase in cap rates increases LTVs by about 10% to 12% in our portfolio as we’ve been going down and reviewing all of those dynamics. So what I would say is we’re not seeing any issues with respect to current debt service coverage on our commercial real estate. And as it’s coming up for renewal, we’ve been taking really aggressive proactive steps to either rightsize the proceeds or work with the borrower to get additional enhancements if we’re settling for a lower debt service coverage ratio and a higher LTV.So, so far, if you look at all of our asset classes, we gave you a lot in in office, we’re in pretty good shape there. And I think on one of the slides in office, we showed the maturities left this year.

We’ve already kind of resolved about $200 million in maturities in office in 2023, and we did that by either getting additional credit enhancements, paying down the proceeds and working and getting additional equity from our borrowers. And obviously, as we’re settling those at the new yields, we’re still comfortable that we’ve got reasonable debt service coverage, and we’re still within LTVs.Matthew Breese Understood. Okay. And then I was hoping you could just talk about the New York City market in the wake of signature and everything going on with some of the other players in that market being dislocated. Does it change your view of how you attack or kind of man the field in regards to New York City, what kind of opportunity is there to take market share in the wake of this disruption?John Ciulla Yes.

I guess we look at it two ways, right? So you think about managing from a credit perspective, all of our New York City real estate exposure. And I think the critical thing is we look again at having strong borrowers, strong sponsors, strong property and conservatively underwritten loans. And so while, obviously, we believe that they’ll be stressed, particularly with the loans that Signature Bank we will be selling in the New York Community Bank didn’t buy. We’re not too worried about the impact on the overall market as long as we’ve got really good sponsors standing behind their properties and we’re able to work through borrowers and as we said in our commercial real estate portfolio in New York, there is no cliff there, right? We’ve got limited maturities, strong lease flows, good LTVs. And so we’re working with each of our individual borrowers as we move forward.I think as the dust settles, Matt, and we think about opportunities in the market, we do believe that there’ll be potentially teams available.

We do believe that there will be high-quality transactions available to us. I think right now, if you think about what our management team has been focused on for the last quarter, obviously what you’d want us to be focused on, which is making sure that we’ve got strong liquidity that we’re looking at our own credit and that we’re thinking about how we’re going to be able to react in the future and how much flexibility we have given our funding advantage given the fact that we think we can continue to grow deposits, I think we will opportunistically take share, but we want to make sure we’re doing it in asset classes we think, are strong with the right relationships and at the right time. So I do think there is an opportunity for us to continue to smartly grow our book there, but we’re also very cognizant of the market dynamics in New York right now, the potential for a recession at the end of the year.

So what I’d say is, yes, opportunity in the future, but really prudent about how we go about deciding where and when to take that share.Matthew Breese Got it. Understood. Last one for me. Just on interest rate sensitivity, I see in the down rate 100 basis point scenario. I think NII is down now about 2.8%. This is off from, I think, 3% at year-end. As you continue to move the ball forward on this front, by the time we do get to 2024 and potentially close to rate cuts, where do you expect the balance sheet sensitivity on this metric to be?Glenn MacInnes Yes. So let me take that, Matt. So you’ll probably see on the same chart, I think you’re back on Page 28 or so that we continue to reduce our asset sensitivity. And so we’ve done some things that we talked about at Investor Day, of loan swaps, collars and things like that.

So we continue to manage that down. I don’t think we will be at a neutral point, but I think we continue just to work that down.Matthew Breese Okay. Understood. That’s all I had. Thanks for taking my questions.John Ciulla Thanks, Matthew.Operator Our next question comes from Daniel Tamayo from Raymond James. Please go ahead. Your line is open.Daniel Tamayo Thanks, good morning, everyone. Just one question for me. I think, Glenn, you had mentioned that the – you expect to hold a higher percentage of normalized excess cash kind of going forward. Curious if that’s similar to the amount that you’re holding now or if that – if you expect that to grow and kind of the time frame where you think that might have to stay on the balance sheet?