Q3 2020 Webster Financial Corp Earnings Call

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Good morning, and welcome to the Webster Financial Corporation's third quarter 2020 earnings call I will now introduce <unk> director of Investor Relations carry Matt. Please go ahead Sir.

Thank you Maria welcome to Webster. This conference is being recorded also this presentation includes forward looking statements within the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with respect to Websters financial condition results of operations and business and financial performance Webster has based these forward looking.

These statements on current expectations and projections about future about actual results might differ materially from those projected in the forward looking statements additional.

Additional information concerning risks uncertainties assumptions and other factors that could cause actual results to materially differ from those in the forward looking statements is contained in Webster financials public filings with the Securities Exchange Commission, including our form 8-K containing our earnings release for the third quarter of 2020, I'll now introduce websters.

Chairman and CEO, John do you have that.

Thanks, Terry Good morning, everyone, I hope, you're all safe and well.

Thank you for joining Webster's third quarter earnings call CFO, Glenn Macinnes, and I will review business financial and credit performance for the quarter after which they say bank President Chad Wilkins and Jason Sodo, Our Chief Credit Officer will join us for <unk>.

As a reminder, our presentation deck includes a supplemental section containing additional information and disclosures.

We remain focused on managing capital credit and liquidity as we continue to deliver for our customers communities and shareholders.

Positioning ourselves for growth and outperformance our differentiated businesses and are engaged bankers, who I'm. So proud of help us win in the marketplace every day in a challenging environment, we generated meaningful business activity in the third quarter, our bankers are working with our customers and prospects and we're generating new relationships loans and deposits loans.

Our nation's were higher than a year ago, and our pipelines are solid HFC bank is winning more direct to employer relationships than a year ago, our operational execution remains strong and we continue to manage credit and enterprise risk effectively.

Turning to slide two pre provision net revenue of 110.4 million increased 2% from Q2 as revenue grew in excess of expenses earnings per share in the quarter were 75 cents compared to 57 cents in Q2 and a dollar in the prior years third quarter.

$23 million provision resulted in a reserve build of $11 million Glen will walk you through the assumptions underlying the cecil process, and resulting provision for the quarter our.

Our third quarter return on common equity was 9% and the return on tangible common equity was 11% as I mentioned last quarter, we remain confident in our ability to again sustainably generate economic profit even in this more economically challenging and lower interest rate environment ill provide further perspective in a few minutes.

Loans grew 12% from a year ago on slide three or 5% when excluding $1.4 billion in PPP loans commercial loans grew more than 10% from a year ago or by almost 1.2 billion led by growth of more than $900 million in high quality commercial real estate loans.

The decline in floating in periodic rate loans to total loans compared to year ago reflects the $1.3 billion of fixed rate PPP loans added in the second quarter.

Deposits grew 16% year over year, driven across all business lines core deposits exceeded $4.3 billion and represent 90% of total deposits compared to 86% a year ago, while Cds declined $685 million from a year ago.

Slide four through six set forth key performance statistics for our three lines of business.

Commercial banking is on slide four loan balances increased almost 10% from a year ago, excluding PPP loans, both investor Cree and Cnine businesses in middle market banking and sponsor in specialty so double digit loan growth year over year decline.

Deposits up 32% from a year ago, our nearly 6 billion at September Thirtyth as our commercial clients maintain liquidity on their balance sheets commercial deposits were up 11% linked quarter on seasonal strains in our treasury and payment solutions business, which includes government banking.

Hey, just say bank is on slide five core deposit growth was 15% year over year or 12.6%, excluding the impact of the state farm transaction, which closed in the third quarter and added 22000 accounts and $132 million in deposit balances.

We continued to see strong increases in new direct to employer business opportunities throughout the quarter, winning more new agents say RFP is than we did last year, specifically in the large employer space.

Slide 19 had impacted DHS, a business with new account openings, 28% lower from prior year when adjusting for the state farm acquisition. This is consistent with the industry and is due to slower hiring trends across our employer customers H.

I would just say consumer spending increased in the quarter a trend we expect to continue as elective medical services continue to open up across the country. This spending rebound had a favorable impact on interchange revenue when compared to Q2.

HPA accounts and balances declined 41060 $4 million, respectively linked quarter.

Continuing the out migration of accounts that we disclosed a year ago.

In the quarter, we recognized approximately $3 million of account closure fees related to the migration.

Performance fundamentals of HSBC bank in the broader HFSA market remains strong with ample opportunity for continued growth and while it's too early to forecast the upcoming January one enrollment season, we're pleased with the large direct to employer wins, we've recorded in this challenging 2020 selling season.

Im now on slide six coming.

Community banking loans grew almost 10% year over year and declined slightly excluding PPP business banking loans grew 5% from a year ago, when excluding PPP personal banking loans decreased 3% from a year ago as an increase in residential mortgages was offset by declines in home equity and other consumer loan.

Loan.

Community banking deposits grew 12% year over year with consumer and business deposits growing 6% and 32% respectively. The total cost of community banking deposits was 24 basis points in the quarter, that's down 48 basis points from a year ago.

Net interest and noninterest income both improved 3% from prior year, driven by increased loan and deposit balances and by mortgage banking and swap fees respectively. So.

Self service transactions declined slightly linked quarter as we expand into open banking centers with enhanced safety protocols, but grew year over year, reflecting the continued shift in consumer preference to digital channels.

The next two slides address credit metrics and trends our September Thirtyth reported credit metrics remained favorable and actually improved modestly, which Glenn will review in more detail while pleased with the reported metrics. We nonetheless remain appropriately cautious on credit as we continue to operate through the considerable uncertainties presented.

By the pandemic.

On slide seven we've updated our disclosure on the commercial loan sectors, most directly impacted by cobot, including payment deferral information.

The key points on this slide are the overall loan outstandings to these sectors have declined 5% from June thirtyth, and the payment deferrals of declined $282 million or 57%.

On slide eight we provide more detail across our entire 20 billion dollar commercial and consumer loan portfolio. The key takeaway here is that payment deferrals declined by 65% to $482 million at September Thirtyth, and now represent 2% of total loans compared to 7% at June Thirtyth.

Consistent with industry trends, we have had meaningful declines in payment deferrals in every loan category from June Thirtyth to September Thirtyth.

Of the $482 million of payment deferrals at September Thirtyth $251 million or 52%, our first time deferrals.

Cares Act and inter agency statement payment deferrals, which are included in the $482 million of total payment deferrals at September Thirtyth decreased to 62% from June Thirtyth and now totaled just 283 million.

While pandemic related challenges remain we are pleased to have been able to provide considerable support to our customers and communities under our mission to help individuals families and businesses achieve their financial goals.

As I stated last quarter, we are actively monitoring risk, we're making real time credit rating decisions and addressing potential credit issues proactively we continue to feel good about the quality of our risk selection, our underwriting our portfolio management capabilities and the strength of our capital and credit allowance positions I will now turn it over to Greg.

Then for the financial review.

Thanks, John I'll begin with our average balance sheet on slide nine average.

Average securities grew $184 million or 2.1% linked quarter and represented 27% of total assets at September Thirtyth largely in line with levels over the past year average.

Average loans grew $262 million or 1.2% linked quarter PPP loans averaged $1.3 billion in Q3 and grew $403 million from Q2, reflecting the full quarter impact of loans funded last quarter, we had no forgiveness activity on PPP loans during the quarter and therefore, no acceleration of the.

These days.

During the quarter, we had five and a half million of PPP fee accretion and the remaining deferred fees totaled $35 million upon.

Apart from PPP loans commercial real estate loans increased $124 million or 2%, while asset based and other commercial loans decreased $108 million and 38 million respectively.

The 119 million decline in consumer loans includes 62 million in home equity and $32 million residential mortgages to pay.

Deposits increased $1 billion linked quarter, well in excess of the combined growth of Florida, and 46 million in loans and securities.

We saw increases across all deposit categories, except CD, what's declined $280 million or nearly 10% the call.

The cost of Cds declined 36 basis points and was a significant driver of our reduction in deposit cost.

Public funds increased to $599 million in a seasonally strong third quarter, while the cost of these deposits declined from 35 basis points to 18 basis points.

Borrowings declined 744 million from Q2, and now represents 7% of total assets compared to 8.5% at June Thirtyth and 10.5% in prior year.

Regulatory risk weighted capital ratios increased due to growth in equity the tangible common equity ratio increased to 7.75% and would be 34 basis points higher excluding a $1.4 billion in zero percent risk weighted PPP loans.

Tangible book value per share at quarter end was $27.86, an increase of 1.7% from June thirtyth and 4.8% from prior year.

Slide 10 summarizes our income statement and drivers of quarterly earnings net.

Net interest income declined $5.1 million from prior quarter lower rates, resulting in a quarter over quarter decline of $16.7 million in interest income from earning asset.

This was partially offset by $7.9 million due to lower deposit and borrowing costs and $3.7 million as a result of loan and security balanced growth.

As a result, our net interest margin was 11 basis points lower linked quarter core.

Core loan yields and balances contributed 14 basis points to the decline with PPP loans contributing another two basis points the NIM decline lower.

Lower reinvestment rates on our securities portfolio, resulting in three basis points of NIM compression, while higher premium amortization, resulting in additional four basis points of NIM compression. This.

This was partially offset by a 10 basis point reduction in deposit cost reflective of reduced rates across all categories, which benefited NIM by 10 basis points and fewer borrowings contributed another two basis points of NIM benefit.

As compared to prior year net interest income declined $21 million $65 million into the decline was the net result of lower market rates, which were partially offset by 44 million and earning asset growth.

Noninterest income increased $15 million linked quarter and $5.2 million from prior year.

HSH fee income increased 4.1 million linked quarter interchange revenue increased $1 million driven by a 12% linked quarter increase in debit transaction volume.

We also recognized $3.2 million of exit fees on Ta accounts during the quarter the more.

The mortgage banking revenue increase of 2.9 million linked quarter was split between increased origination activity and higher spreads.

Deposit service fees increased 1.5 million a quarter over quarter, driven by overdraft and interchange fees consumer and business debit transactions increased 16% linked quarter other.

Other income increased $5.7 million, primarily due to a discrete fair value adjustment on our customer hedging book recorded last quarter.

The increase in noninterest income from prior year reflects higher mortgage banking revenue and age is a fee income, partially offset by lower deposit service and loan related fees.

Reported non interest expense of 184 million included 4.8 million of professional fees driven by our strategic initiatives, which John will review in more detail.

We also saw a linked quarter increase of $4.3 million from higher medical costs due to an increase in utilization now.

Noninterest expense increased $4.1 million or 2.3% from prior year.

The efficiency ratio remained at 60%.

Pre provision net revenue was 110 million in Q3. This compares to $108 million in Q2, and 131 million in prior year.

The provision for credit loss for the quarter was $22.8 million, which I will discuss in more detail on the next slide and.

And our effective tax rate was 20.9% compared to 21.8% in Q2.

Turning to slide 11, I'll review the results of our third quarter allowance for loan losses under Cecil as.

As highlighted the allowance for credit losses to loans increased to 1.69% or 1.8%, excluding PHP loans, we have so.

We have summarized the key aspects of our macroeconomic scenario, which reflect the gradual improvement in employment with.

With real GDP.

Returning to pre coated levels in 2022.

The forecast improved slightly from prior quarter, but was offset by commercial risk rating migration, resulting in a provision of $23 million the three.

The $370 million allowance reflects our estimate of life of loan losses as of September Thirtyth, We will continue to assess the effects of credit quality loan modifications and the macroeconomic conditions as we move through the pandemic.

Slide 12 highlights our key asset quality metrics as of September Thirtyth.

Nonperforming loans in the upper left decreased $10 million from Q2 commercial real estate residential mortgage and consumer each saw linked quarter declines while commercial increased 3 million net charge.

Net charge offs in the upper right decreased from second quarter and totaled $11.5 million after $4.3 million in recoveries.

DNA gross charge offs declined slightly and totaled $12 million, primarily reflecting credits that were already experiencing difficulty prior to the onset of the pandemic.

Commercial classified in the lower left represented 332 basis points of total commercial loans. This compares to a 20 quarter average of 315 basis points and the allowance for credit losses increased to $370 million as discussed on the prior slide.

Slide 13 highlights our liquidity metrics, our diverse deposit gathering sources continue to provide us with considerable flexibility.

Deposit growth of $565 million exceeded total asset growth and lowered the loan to deposit ratio to 81% are.

Our sources of secured borrowing capacity increased further and totaled 11.7 billion at September Thirtyth.

Slide 14 highlights our strong capital metrics regulatory capital ratios exceeded well capitalized levels by substantial amounts our common equity tier one ratio of 11.23% exceeds well capitalized by more than 1 billion Likewise tier one risk based capital exceeds well capitalized levels by $870 million.

Looking to the fourth quarter, we expect stable loan balances with modest PPP forgiveness assi.

Assuming a flat rate environment with an average of one month LIBOR in the range of 15 basis points and an average 10 year Treasury swapped swap rate around 70 basis points. We believe we are near the bottom of core NIM compression.

Noninterest income will likely be lower linked quarter due to a reduction in mortgage banking income and lower HSH fees on Ta accounts core non.

Core non interest expense will remain in the range of Q3, and our tax rate will be around 21% with.

With that I'll turn things back over to John for a review of our strategic initiatives.

Thanks, Glenn Im now on slides 15, and 16 and as I've mentioned on recent earnings calls, we have been and remain focused on revenue enhancements and operational efficiencies across the organization well before.

Well before the onset of the pandemic our management team recognize that we would be operating in a low interest rate and more challenging business environment for an extended period of time in January we began an enterprise wide assessment of our organization to identify revenue opportunities and cost savings using a very thorough and systematic process.

The onset of the pandemic in March further impacted the operating environment and accelerated changes in customer preferences and shifting workplace dynamics. This not only made our commitment to this process that much stronger, but it also expanded the opportunities we have to rationalize and align our expenses with our business line execution.

We've identified and begun to implement dozens of initiatives across the bank a handful of which are set forth on slide 16 that will result in driving incremental revenue, reducing our overall cost structure and enhancing our digital capabilities to meet our customers' needs and to reduce our cost of delivery of products and services.

Our focus remains first on key revenue and asset growth drivers, including accelerating growth in commercial bank by building on our proven track record in select specialized industries, driving HSBC bank growth through improved sales productivity and customer retention and continuing to grow in community core markets through product enhancements.

We are also focused on efficiency and organizational alignments, simplifying our org structure, capturing targeted back office synergies and redesigning and automating critical processes. We also are rationalizing and consolidating our retail and corporate real estate footprint.

Through this process, we will continue to improve the customer experience by enhancing digital capabilities modernizing foundational systems and improving analytical capabilities. We've begun executing on many of these initiatives and we recently made a series of organizational changes to position us for success over the next year and well beyond we plan to provide.

More detailed information on these initiatives, including additional financial details and timing on realization on our fourth quarter earnings call in January as we are continuing to work through all of the final decision.

What I will say is that with respect to efficiency opportunities, we anticipate reducing our current expense base by 8% to 10% fully realized on a run rate basis by the fourth quarter of next year, we see considerable opportunity above and beyond that as revenue initiatives and further efficiency gains are realized late in 2020.

He won and in 2022 as.

As we stated last quarter, we remain confident that even if the current operating environment persists with low interest rates and economic uncertainty that execution on our identified revenue enhancements and efficiency opportunities will allow us to sustainably generate returns in excess of our estimated 10% of cost of capital by the end of 2021.

Our vision remains consistent and is to strengthen our position as a major regional bank in the northeast that lead with a distinctive and expanding commercial business and aggressively growing and winning national HSBC Bank business, a strong community bank franchise in our core markets all supported by an efficient and scalable operating model.

I want to say a big thank you to all of our bankers for their incredible work during these challenging times with that.

With that Maria Glenn Chad, Jason and I are prepared to take questions.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q.

Using speaker equipment, it may be necessary to pick up your handset before profit sorry, one moment. Please while we poll for questions.

Our first question is from Steven Alexopoulos from JP Morgan. Please proceed.

Good morning, everyone.

Steve how are you Jim Hi, John.

John I want to understand the comments around reducing the expense base. So is this 8% to 10% reduction that we look at this quarter's expenses about 65 66 million would be the midpoint you Sam by four Q of next year that will be in the run rate is that the expectation right.

Right and you know I think we can outperform that Steve, but we're absolutely confident to put that bogey out there. So I think you have the quarterly expense base, a little bit lower than one can talk about that but that's exactly what we mean, so if you look at third quarter kind of core expenses, we expect to achieve a 10% reduction in those.

This is by the fourth quarter of next year. So.

Yes, 100% our stay.

Our stated core our GAAP, our GAAP expenses for the quarter were 183, almost 24 and there were some onetime costs in there, but you can use that as profit as the base okay.

And that will obviously help.

With 2022, but as you think about next year I think we're all struggling with what pre tax pre provision income growth could be for everyone right. Glenn. It's helpful that NIM is close to a bottom but could you frame for US. Obviously this is going to set up a better situation two years from now but talk to us about the ability to grow pre tax pre provision next.

Year.

Steve I'll give you a little obviously, we're not going to provide.

Detailed guidance I'll give you a little bit of perspective in the fourth quarter will talk as we work through our final analytics and make final decisions will be able to provide you with kind of our quarterly realization of expense saves and revenue enhancement. So we we will see progressive improvement.

You know in our in our operations over the course of 2021. So it doesn't all just magically appear at the end of the year I think from a topline perspective will be we think that we're roughly at the bottom of of NIM compression if rates kind of stay where they are we have confidence that we'll be able to grow.

Assets.

Fees are hard to predict in this environment and obviously.

Provision from a net income perspective, I know you asked about PPNR is kind of a wildcard from a from a profitability perspective. So our full plan is to improve incremental profitability and PPNR each of the quarters. In 2021, so were not kicking the can forward, but we wanted to put a stake in the ground of what we expect to do from.

Sort of a structural realignment of the way we operate.

Into 2022, so I would say stay tuned for more details.

In our January call, but also we fully expect if the operating environment stayed stable that we would see incremental improvement in each of the quarters in 2021 and Steve The only thing I would add to that is and it's not core but as I indicated in my prepared remarks about 35 million and in deferred fees in PDP and we expect during the course of.

2021, most of that would probably be forgiven and so you know that that will impact earnings as well up to say 33 35 million okay.

Okay.

That's helpful and to shift a credit actually before I ask my question. If we look at the COVID-19 impacted loan slide those balances include.

Should any leverage loans.

Are those outside of those buckets and then I have one question.

Uh huh.

Those are all sector basis. They would include any loans, we have related to those segments. Jason I don't know, whether you want to put more color on that yes.

Yes.

Slides include leverage loans, both on the second slide and if you look at the next page Leverages actually broken out separately. So you can see the detail there yeah, Okay, I think somewhere adding leverage on top of those but that's already included okay. That's correct correct. So.

So now I mean, we've been looking at the slide now for two quarters can you talk to us in terms of the deeper dive you've done in the portfolio and where you are now most concerned for losses. Thanks.

Sure, Steve Jason I'll I'll go right to you and then maybe I'll make some comments.

Yes, so when we think about overall losses, what look we do a deep dive we have weekly meetings with the lines of business to assess modifications deferrals trends in a lot of color from our borrowers because we're having conversations regularly.

If you think about in terms of total losses, I think about that in the near term I would say, it's going to be the troubled sectors that we're all focused on.

We had some some credits that were pushed over the edge initially that were having trouble before covance going forward, it's going to be the sectors that were weak that everybody is focused on the hotels travel leisure media restaurants, but.

But going forward I guess, what I would say generally is yeah, I'm a little concerned about the business banking small business portfolio, but if you look at the DTA deposits with those borrowers overall 930 versus pre kobin, they're actually very healthy and deferrals overall are sort of going down so you.

Feel cautiously encouraged at the moment in terms of how that portfolio is going to perform so yes, I think there are pockets of risk throughout the portfolio that we're focusing on but I don't see any area, where we have significant concentration that I'm overly concerned about so we had a good quarter.

In terms of third quarter in terms of charges in NPL I think those numbers will likely get a bit worse throughout 2021 before the return to normalized levels, but I continue to be cautiously encouraged and I think that the likelihood of some additional stimulus given rising cases throughout the country will also be helpful. In net.

Sorry at some level.

Yeah, Jason.

Hey, Steve if you look at our slight pickup in classified.

The biggest contributors for those sectors that Jason just referenced we do look at whether or not we need specific reserves on those credits. We don't have a lot of identified embedded loss. So I do think there are some wild cards about path of the virus about the level of stimulus, but I to agree with Chase and then it's really sector based we're not.

Seeing any differences in performance across geographies business units.

For those or those elements were or product type it really relates to whether a sector you need people to gather and beak and be close together and and travel. So I think those are those are the two because unfortunately relative to our peers, we've got lower exposure in those categories, which which we're happy about.

Yes.

Terrific. Thanks for taking my questions.

Yes, Thanks, Steve.

Our next question is from Collyn Gilbert with KBW. Please proceed.

Thanks, Good morning, guys take my comment.

This is Dan great color I will I will send plan and certainly a great plan to appreciate that.

Hi, John you had alluded to that maybe in the beginning of next year, we'll get a little bit more color, Jeff just curious kind of broadly I know you.

Slide, but just broadly where you're going to see kind of some of those savings. Tom I know you mentioned real estate rationalization or is there any more color you can offer this kind of broadly at the way he doesn't.

Next in coming.

Yes, it's just difficult in terms of where we are in the process to give specifics with some final decisions have been made but I think you know you're right. If you look at our retail branch network. If you look at our corporate space with the changing work environment, we expect to.

Gain material efficiencies in those categories. We're also automating manual processes, combining like functions across.

Across HSH, and Webster and creating centers of excellence that not only we believe will bring us efficiencies, but as importantly, cone will make our ability to deliver for our customers better and take out FX and so we're pretty excited about some of the preliminary work we are doing and I think we're prepared to.

The cost will be out there because we've been working on this for 10 or 11 months you know Glenn referenced the the the additional expense related to the project. We're obviously using professionals and outside help to go through this process and we think it will change the way, we do business and transform the organization. So we look forward to sharing more in the in the.

In the first quarter on our call, but we're not really prepared to go any deeper right now.

Okay. Okay, and then just in terms of kind of your outlook for loan growth with the.

With the comment that you made the intention is to try to continuing to build PPNR next year.

Oh, well, where do you see the opportunity to kind of grow the loan bucket from a geographic perspective or from a loan segmentation perspective.

Yes, no I think Thats a great question.

Ill related a little bit to steves question on credit performance that it really ends up being sector based and we're fortunate as we said before to have either been really good or a combination of lucky and good in.

And where we play so we don't have a lot of we're not relying on a lot of oil and gas we're not relying on leisure.

Leisure hotels and so.

And so we've been focused as you know in healthcare technology and technology infrastructure, which is our largest exposure in the sponsor and specialty business and as not only performed brilliantly.

During the pandemic, but it's actually accelerated so we had $173 million in new originations in sponsored specialty in Q3, our commercial real estate has been really good we've been focusing a lot on albeit lower earning but really high quality institutional government.

Actions in our mid.

In our middle market group. So you know we had $531 million in commercial bank originations in the quarter.

Which you know sort of is similar to what we had in Q1 before the pandemic really setting. So I think for US. There is no question that loan demand is going to be muted. That's just the way it's going to be because I think theres going to be an uncertainty not as much a corporate confidence and investment.

And I think you know even individuals as you know are keeping a very.

Very liquid right now so.

So I think demand will be down, but I think there will be pockets and sectors, where we play very well, we'll we'll continue to to make to make new loans, So and I do think what we said in in our one Q call that even though before we had seen any behaviors are gas was that loan origination would be lower but that prepayments would be lower that's all.

Coming through so this quarter, we saw loan growth on lower originations in commercial and we obviously had had kind of really high mortgage origination. So I think we'll still see mortgage we will see some growth in personal loans and in commercial in the sectors, where we performed best in where we have great relationships and our.

Not being negatively impacted by the pandemic I still think we have confidence that we can grow assets.

Okay. That's great and then just one final question on.

On M&A and you're welcome to answer it relative okay for the bank, but just curious as to how you guys are thinking about potential acquisition as you look out for sale, obviously are dropping it within your own organization, but what kind of opportunities are a little bit longer term or more broadly.

For you guys to really increase scale through through acquisition again through either that the core bank 48 Cathay Bank.

Sure. It's a great question and you know our comments have evolved over the last couple of years on the calls from a complete focus internally to a recognition that we.

We do think scale is really important and so I would say that we're always looking you saw the state farm transaction. There are other transactions like that in the marketplace that we look at all the time.

With respect to HSH portfolio acquisitions teams of commercial bankers those are things, we would act on regardless of what the environment is and we do think that there is a higher likelihood that we would be engaged in some sort of bank M&A you know on the other side of this and so what you see right now is our laser focus on.

Making sure that we are recognizing our potential from PPNR per se.

PPNR perspective in evaluation perspective by focusing on being the best we can be scalable and nimble, which I think will put us in a really good position because we believe that there will be more M&A in the mid cap bank space coming out the other side of this and we want to make sure we're controlling our destiny and as I said, we never say never.

Were focused internally now, but we do want to gain scale.

When there's clear visibility on the other side of credit through this pandemic.

Okay, that's great alright, Thanks, I will leave it there.

Our next question is from Mark Gibson with Hypersound that please proceed.

Hey, guys. Good morning, Mark good morning.

Just to follow up on one maybe for Jason I know, it's hard to sort of estimate there's lots of variables at this point, but based on what you see today, how are you thinking about provisioning levels and say the fourth quarter and beyond.

Yes, sure I started my view when you want to jump in as well. So when you think about some of the bigger drivers ratings migration right. You. So we had some migration to classify this quarter I would say as we got a view into revenue the revenue recovery in the third quarter from a lot of our borrowers right. Many of them recovered very quickly some of them we realize this.

Take a little bit longer those are the ones that we downgraded to classified I feel like at this point, we've got the book well rated and we'll probably be calling balls and strikes over the next few quarters. So I don't see a major level of migration at this point some of the situations and special mentioned they may deteriorate, but you'll pay.

We have just as many if not more that will improve so I don't see a huge pressure barring an increase in cases or if something falls apart in terms of additional stimulus I don't see a huge pressure on reserves in the short term, but obviously that could change based on the environment.

Okay, Mark let me just add anything to that yes.

Yes, Mark I will this is John and then I'll, let Glenn provide the technical and just from top to US I think this quarter Mark is a really nice demonstration of kind of the way. The process is supposed to work we had very little aggregate loan growth. So you think about the portfolio not growing that much which means you didnt need to increase your provision for life of loan losses for a lot of.

Incremental exposure you saw the Moody's outlook that that us and many of our peers use sort of get marginally from more favorable so that didnt require kind of look at it to flat to slightly better.

Some of the qualitative factors around the level of modifications and everything came down.

So that would require lower and then you saw a little bit of drift into classified some internal risk rating migration, lower which kind of offsets those other positives and lo and Behold, we had $11 million in net charge offs, we built our reserve a little bit so.

It really depends on how fast we can grow loans going into next year, what happens in our risk migration and what the path of the virus does to movies forward.

Forward look to really give.

To give you an indication of kind of where we might be from a provisioning perspective right now I think between you and Jason you covered the only thing I would add is that most of us are using in the mid cap space for use in the movie based baseline forecast and is keep in mind that has about 1.5 trillion in stimulus built into late and so plus or minus depending on what happens there but as.

But as John and Jason both pointed out I mean, I see it more as we look at this thing from a duration standpoint, and right now liquidity seems good customer seems strong, but it's all going to be a matter of the course and pandemic and liquidity and so we're keeping a very close eye on it.

Okay, and then secondly, it looked like I mean, the deferral trends look terrific I guess I'm curious is new dramatic differences across the various geographies that you all trafficking as New York, and New York City being much harder hit in the deferral rates much higher than they are say in Connecticut or elsewhere, yeah, it's interesting and I'll ask.

Jason obviously for his comments on market funding and I just mentioned that when Steve asked the question, we havent seen real differences in geographies, it's been much more sector based right. It's not it's not whether you're in New York and Boston, It's whether you're a hotel or Multiuse facility in real estate. So it's definitely more sector, driven and I will remain.

And folks it's interesting and I have to mention Bill ranks name on every earnings call I think thats a trend, but he was never one to dive into New York City.

We've got we've got significant real estate exposure in New Jersey, and down into Philadelphia, and then up in Boston in Connecticut.

But we don't have we're not going to over overweight in the metro areas. If you will so.

So we havent seen the kind of risk in New York multifamily or.

Or or other areas, so geographies havent really impacted us I will tell you anecdotally and I know Mark you live in the new came in I think we.

We have seen precipitous increase in home values in northern Westchester and Fairfield County, as evidenced by some of the Oreo properties and other things it's been pretty spectacular the growth outside of the metro markets, which has stabilized and taken any risk. We had had in terms of home prices in our core market kind of out.

But that's really the only geographic the thing that I've seen is a little bit of flight from metro and an impact on home prices and rents now Jason Yes, No. I think you you mostly hit it I guess, what I would say is initially right. If you look at the deferrals that we got in our consumer book. It was certainly a disproportionate amount in new.

New York right early on New York wasn't doing so well.

But at this point you saw consumer deferrals to decline to under onto a million dollars and overall, we are feeling better about the portfolio actually thank you know there's been some benefit within our footprint because of the stronger relative numbers at this point so the portfolios like business banking mid market right and a good portion in commercial real estate I think have also benefited from that through.

At this period.

And then the last question I had I know John you said, it's a little early to talk about renewal season, but I'm not sure Chad on the line. If you could give any color on sort of what are you seeing how the pipeline shaping up and also maybe help us think through any potential ramifications on the agency business in the event that we do see a little way.

Great questions Mark I will.

Ill take the Blue wave question in a chat can can give the rest you know we've been studying a lot spending a lot of time with the lobbyist in Washington, and we really do feel good and we can say with confidence that we have been in the cares Act there were discussions about how we could leverage the HSH account.

Product.

To help and so I think there is kind of bipartisan support for HSH go.

Going forward as a really good tool to allow people to kind of deal with health care costs.

And even have an HSH as part of the Medicare program at some point. So our view right now is that with respect to the still low probability of a complete replacement of our private insurance system with a single payer.

Up program and a lot of the talk that is going on that could benefit HSH is we feel like politically we're in pretty good shape, regardless of what the outcomes of the November election, our Chad maybe you can provide some guidance and details on what you're seeing as you head into the January one period.

Yeah. Thanks, John Thanks, Mark.

I agree with John your comments on the political environment I think you know under Obama care agencies for.

Agencies were largely there was very limited impact and we grew quite a bit during that administration. So I think it's more likely grab positive impact the negative.

With regard to sales results were really happy with what we're seeing at this point in the year for one one particularly in the large employer.

Space, and we've had 12 large employer wins and our.

And our pipeline in the.

Closed contracting section in the pipeline is more than two times what it was at this point last year. So we're we're really happy with the results. We're seeing in the area, where I think everybody on this call that we've been investing in sales marketing and product capabilities.

To drive these kind of results and in the channels that we can influence directly and so we're happy to see those results that said I would want people to keep in mind that 80% of our accounts coming from existing employers and you heard John mentioned that due to.

The pandemic and a weaker labor market, we've seen about a 28% decrease and enrollments come back some.

Somewhat here at the end of the third quarter.

But we're still.

Not seeing a stronger enrollments yet from our large employers or existing employers, we expect that to come back as the economy rebounds, but while we're under.

It's about let me stress that will be skewed also a couple of our large health plan providers.

Our under a bit of pressure and we.

So when we don't have as much visibility into that segment. So its.

So it's hard to call the ball for one one but in the areas, where we have visibility we get impacted directly like what we're seeing.

Thank you.

Thanks, a lot mark.

Yeah.

Our next question is from David said, Bernie with Wedbush Wedbush Securities. Please proceed.

Hi, Thanks. Good morning, Good morning, I had a follow up I had a follow up first on on credit looking on slide eight how the percent of the portfolio that is in deferral for leveraged loans in middle market at 4% for each are the two highest I was curious when when push comes.

As to shove will sponsor step up in the leverage portfolio to support their their investments in the equity they have in these deals.

David I'll provide some overview and then I'll turn it over to Jason.

It's always hard right to make a really strong statements with conviction.

That's one of the reasons were in this business and you know we we just recently had a situation where a 20 year sponsor relationship there.

They went above and beyond to make sure that the bank was taking care of and we were in this business as you know through the great recession. So my comment is that we believe that we are careful to select sponsors who we do business with we go deep with sponsors with expertise and build relationships.

And so we have a track record of when the going gets tough.

Both parties come together and figure out a solution. So my answer is yes, there are.

There are times, where.

A sponsor can't put good money after bad if theres something fundamentally flawed with the business, but if your risk selections. Good upfront you partner with the right sponsors that is a wonderful secondary tertiary sets us up.

Fourth.

Support function so.

The other thing I will add and I've said it before is that the way to look at it is pretty simple if the sponsor is purchased a business in a sector, where they feel like there is real value real growth opportunity and the ability to create growth.

The pandemic, which is a temporary delay right. There is really not that many paradigm shifts maybe there will be a paradigm shift in commercial real estate and other areas down. The road you really have to figure out if we're lending money appropriately at reasonable leverage levels, meaning that there is significant cash equity usually in generally.

Much more than the actual debt.

The company that the borrowers not going to hand, you the keys when they're trying to protect a significant amount of investment and they know that the issues are only temporary so unless the business has some sort of fatal flaw.

They're going to ride through this with US we're going to provide them some sort of deferrals of payments or covenant relief, but they're going to put in additional cash equity and support the company to make sure at the other side of this temporary issue that we have not a permanent one.

That may can reach their potential with their company and get a return on their investment so long winded way, but you know that I thought about this a lot and we've seen it be a benefit to our credit performance through the great recession and.

Early on in the pandemic.

Jason is there anything you want to add to that yes, no I'll give a little bit more specifics right. So I'll talk about sponsor and leverage together you know the majority of the modifications have been in fact non payment related payments down to about 3% on a combined basis and sponsors in a lot of cases have been supportive in about a third of what I'll call the more major.

Modifications that we've done in the portfolio. There has been some level of support provided by the sponsor either cash equity sub debt or guarantee a portion of the debt and that includes in the restaurant space, where we've modified ill hand.

A handful alone is about 45, 50% of those there's been double digit equity thats come into these deals or sub debt. So I've been very pleased overall with the performance of the portfolio.

During during this time period and support from the sponsors.

That's great color. Thanks for that and then a follow up on.

The loan growth outlook. So I wanted to reconcile you know a couple of comments that you made on on the one hand, you mentioned about the fourth quarter, you know expect stable loan balances and you mentioned about how about loan demand is muted earlier in the call you mentioned about how pipelines are solid and one of the initiatives as.

We look out to next year is to accelerate.

Commercial loan growth. So I was curious is it more of a timing thing that the solid pipeline should lead to an acceleration in loan growth next year and that the near term clearly sounds like it's flat or just curious as to what your thoughts are there.

David Another really smart question and it's tough when we ever answer questions. Even pre pandemic about this you know kind of what I've said is we really have confidence that the the personal loan side in terms of mortgage and others are very there is some seasonality to it obviously and then there is also you know interest rates impact demand refinance.

Activity, when we talk about commercial banking and business banking, we've demonstrated over a seven or eight year period of time. This ability to grow loans, you know double digit, but we've had quarters that are.

Show less growth may be seasonality may be disproportion amount of of pay downs, obviously right now were not confident in the double digit growth environment Theres, just the not the economic backdrop and the.

And the loan demand there, but again quarterly its its going to be interesting. We do have a lot of big mortgage pipeline. Our commercial pipeline is solid it's not what it was last year at this time, but it's better than the last two quarters I'll give you a couple of dynamics, if you're thinking short term, we do think that there could be some more.

Hi, originations in the fourth quarter and additional payer.

And additional pay offs, particularly if the sponsors in real estate or C. and I are looking to do transactions before the end of the year, if they're concerned about retroactive tax moves by a new government in.

In terms of what might impact 2021.

So we do think the fourth quarter has the potential of being a little bit better from a loan growth perspective, but again it may be just better originations and higher payoffs, which lead to the same level of modest loan growth.

We are in the early stages of rolling out some new.

Sponsor and specialty industry verticals and middle market industry verticals and again, we'll talk more about that in January in earnest, but that will take a while to ramp up. So I Wouldnt think can you and you know us as risk managers. This isn't the time to be.

Going all in in a new sector. So you'll see us start to grow those sectors smartly over the course of 2021 and into 2022. So I think you have to think about originations you have to think about whether or not there will be higher prepayments and whether there are seasonal reasons or or political reasons why you might see in.

Creased activity and then what I would say is we think we can outperform the market with respect to loan growth, which will be somewhat muted. So I hope that it may sound inconsistent, but I'm trying to sort of be thoughtful about the short term and the long term.

And I think the best thing to say is we we know we've got a track record of being able to grow commercial loans at the top.

You know in the top decile or top quartile market.

That's helpful. Thanks, very much thanks.

Thanks, David.

Our next question is from Jared Shaw with Wells Fargo. Please proceed.

Hi, good morning.

Maybe.

Just circling back on the on the credit question.

Yeah.

Should we think that as some of those potential NPL formation surcharges, Jason you talked about coming later in the next few quarters come through should we see the the allowance as a ratio then start to come down a rig fully provided.

For for future charge offs or.

Would we would we likely see charge.

Charge offs being covered somewhat by by provision or can we expect to see that ratio CLL ratio start to trickle down.

Hey, Jared out ill take a quick shot and then give it's just from a high level. Obviously you know we feel really good that we've got all of our identified loss content captured in what is a you know and above market level provision. So I think if you. If if we end up performing at our base case of credit outcome, which as Jason mentioned.

We do think we will see some weakness.

But I think the industry generally feels on a lag basis, we could see some cracks in credit.

In the first few into Q, we feel.

We feel like we are covered for our base case, and obviously, if the dynamics change or as Glenn said the path of the virus.

Indicates a longer duration of economic uncertainty then that could impact the provisioning going forward Jason.

Yeah, I think you guys hit all the right points and I guess, if I look at the situation right now, but there are some accounts that I do expect will could worsen right, depending on the length and recovery and overall liquidity to borrow but I'm also really cruel cautiously optimistic that there are a lot of borrowers that will employ.

So when I look at it on a net debt basis, putting some of the other factors aside I don't feel like there will be as much pressure from a reserving standpoint, and I do feel that we are well covered I know, we're sort of near the top of our peers and so I feel good about.

Where where that lies so of course as everybody said, it's going to depend on the path at a virus what the new stimulus assuming it's approved looks like and where is targeted and in the big thing that I know Weve also mention is consumer behavior right take some of these things like movie theaters entertainment venues other things like that it just could be a much lower.

Longer returns overtime, but at the moment I feel really good about where reserve I think there is likely to be less pressure and and I'm cautiously optimistic.

That's great color. Thanks, and then you're talking about the potential for higher originations offset by you know the pay offs in fourth quarter, when you're looking at new loan originations right. Now can you comment on on what you're seeing in terms of pricing or spreads or or structure are you able to put on.

Is that incremental loan that's coming on you know in a in a better position for the bank overall, whether you look at pricing or structure, yes.

Another great question Gerard I think the short answer is yes, right now I don't know how long that duration will will go I guess write ups from the business line leaders and this this the the line of businesses within commercial and and and community.

And they all talk about the marketplace and I did see sort of saying that in this quarter and if we look at the numbers, we have had better credit spreads for same risk rating.

But they've talked about competition coming a little bit back into the market and people getting a little more aggressive again, so I don't know how long the last but I will tell you that from a pure statistical perspective, it looks like we got paid more for taking the same risk or lower risk and structure in the third quarter.

And again, you know our spread and our yield is dependent not only on that variable what we're able to do in terms of pricing risk, but also on the mix and so.

We had pretty solid in our sponsor and specialty, particularly in technology pretty pretty terrific yields with good structures, we've got such a fantastic team there and theres not as much competition from the non banks right. Now so I think that helped us from a pricing and structure perspective, we also as I mentioned onboarded a lot of.

Kind of government and institutional loans, which have significantly lower yields, but really high and kind of investment grade like credit metrics. So.

Metrics so.

The short answer is mix matters for us, but the short answer to your question is I think for a period of time, we've been able to get better structures at better.

At better pricing, but I don't know how long that will last depending again on on the variability of the economy.

Okay. Thanks, and then just finally for me switching to capital you're seeing good growth.

In ratios.

CE this quarter and then with with the expected run off in PPP that should you know most likely to still get better how are you thinking about capital management as you head into you know maybe me maybe say head into 21 is.

Or buybacks attractive as part of that strategy should we be thinking about the dividend or or is it still too early to say given the broader uncertainty.

Yes, I think it's you kind of characterize at the end, it's too early to say in terms of making the call, but I think you've hit it we obviously because of the economic headwinds all of a sudden our payout ratio went higher than our range, but we're really confident about our ability to maintain our dividend at its current low.

Level and so we think we're going to grow back into that from an earnings perspective and be right in that 40% to 45% range, which has been our long term target and we have grown our capital levels. We think it's prudent right now and we do think where we sit on that it's a little bit premature for a number of reasons.

To engage in repurchasing our stock you know we started two in January we kept talking about supporting loan growth and looking at strategic inorganic opportunities and HSH and Thats why we were sort of delaying a week ago.

We began we thought the prudent thing to do obviously when the pandemic. It was to not repurchase shares I think when we feel like the coast is clear given our capital levels that will be back on the table.

Great. Thank you.

Thank you.

Our next question is from Matthew Breese at Stephens incorporated please proceed.

[music].

Matt Hi.

Matt did we lose you.

Thanks.

Matt.

Yeah, I think we lost.

Operator can we give matt a minute to dial back in.

Of course.

Please press star one to join back in that.

Yes, maybe we can follow up with math.

Okay.

You bet.

Gone. Please proceed.

Hey, guys can you hear me now.

You can imagine we promised we did not have to dump button.

[laughter].

I believe you good day.

Just thinking about the 8% to 10% expense save number yes.

That's a net number I'm just curious what's what's the gross number should we get a good idea of the dollars being reinvested into the other programs.

That is the 8% to 10% is off our base and so that is that is that is the number right. It's not where it is if you looked at our run rate and looked at our core expenses you would expect on a go down 8% to 10% that includes reinvestment and all those other correct. So if the net number on what you are saying is.

You know at some level above that not materially you know right now we've got the ability. We've we've invested heavily in a lot of digital automation business process tools and so we're leveraging a lot of prior investments to continue to get efficiencies. So you know we're not announcing simultaneously.

Significant investment in go forward technology, so that that gross number is not twice the net number Matt. It's it's a you know that includes as Glenn said.

The money that we have to reinvest to to get everything out of the program.

Got it Okay, and then just framing the loan growth initiatives a little bit more doesn't include a you know any material mix shift in the composition of the loan book right. Now I think you mentioned some of the specialty areas you're in the sponsoring and specialty book. So should we expect some outsized growth in those areas relative.

The others can and does it also include any sort of geographic expansion should we expect you to break out of your your core northeast footprint yet.

Thats great. Thank you.

We've been pretty deliberate overtime, and you know and I always tell the story of coming here in Stamford was the Stamford, Connecticut was the great Western Frontier and you know weve since move to Providence in Boston in White Plains in New York, and Philadelphia, and Washington, DC, you have noticed that we have not made a big geographic move over the last you know.

Handful of years, largely because of the competitive dynamics and most recently, obviously you know Jim.

Just kind of the economic landscape.

When we think about commercial we think about doing things, we do well, which we've been able to sort of replicate geographic expansion. So in our current plans I don't think you'd see us move into a market at the tail end of a pandemic because you end up being the lender of last resort and there may be some risk choices there I would.

Before three or five years, I think its something weve, a core competency and.

But we also think in terms of what we've been able to slowly and smartly and deliberately add new industry verticals by hiring really talented bankers.

And so you know, we're looking to kind of expand our healthcare practice, we're looking to do.

Or more in spaces, where we can gather deposits as well as use our balance sheet and make loans. So I think we'll talk to you a little bit about it more in January but the reality is we.

We're thinking like you're thinking which is you know we're not going to bet the bank on going into new geographies or new areas, where we don't have deep expertise and even if we do and we're we're kind of instituting a different risk profile, it's certainly not going to outgrow the stuff, we're doing that we know well so.

I think that's that's where you're wanting to hear I think thats. The answer to your question is that you're not going to see us.

Make big risk choices or go into new industries that.

That are going to meaningfully impact either our credit performance or our growth in the short term will we'll we'll dabble will move forward in areas, where we think there's protectable predictable.

Recurring cash flows and we'll grow those businesses slowly or will move into new geographies and will grow them slowly to make sure that we don't make bad risk choices I understood and then.

And then maybe just tying this discussion into M&A you know, there's a bit more willingness your leased it sounds like to do or think about whole bank M&A as you think about potential geographic expansion over the next three to five years, you know could you.

Could you acquire into those markets what would those markets look like you know what markets do you like and then maybe five.

Financially speaking could you give us some parameters on on deals that would make sense to you.

Way too premature, Matt and I was careful to say that as we said we've been evolving our view and we think that there will be more M&A in the mid cap space right. Now we're focused on making sure that we're maximizing our potential and putting us in a position where if that's you know on the on the top five of our priority list as you look for.

Forward a year from now we'll be able to make those choices and make those decisions that you're referring to right now, but what way too premature understood. Okay. Just last one for me.

He'd like to the call.

Yeah go ahead that last question, Yeah really quick what was the all in PPP income this quarter.

Difficult 9 million, all and I'm like okay perfect. Thank you.

Thank you.

We have reached the end of our question and answer session I would like to turn the floor back over to John for concluding comments.

Thank you very much and thank you for joining us this morning, and I hope all of you, we remain safe and well, thanks and have a great day.

This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.