Q3 2023 Webster Financial Corp Earnings Call
Speaker 1: Good morning, welcome to Webster Financial's third quarter 2023 earnings call. Please note this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emmeline Harman, to introduce the call. Mr. Harman, please go ahead. Mr. Harman, please go ahead.
Good morning, welcome to Webster financial third quarter 2023 earnings call.
Note. This event is being recorded I would now.
I'd like to introduce Webster's director of Investor Relations Emlen Harmon to introduce the call. Mr. Herman. Please go ahead.
Speaker 2: Good morning. Before we begin our remarks, I want to remind you that the comments made by management
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 1095 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.
Speaker 2: may include forward-looking statements within the meaning of the Private Security's 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.
Information about risks and uncertainties, which may affect us the presentation and the presentation and accompanying managements remarks can be found on the company's investor Relations website at investors Dot Webster Bank Dot Com I'll now turn it over to Webster Financial's CEO John CLO.
Speaker 2: The presentation and accompanying management remarks can be found on the company's investor relations website at investors.websterbank.com. I'll now turn it over to Webster Financial CEO , John Seuvel.
Speaker 3: Thanks, Emlin. Good morning and welcome to Webster Financial Corporation's third quarter 2023 earnings call. We appreciate you joining us. 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.
Thanks, Tim and good morning, and welcome to Webster Financial Corporation's third quarter 2023 earnings call. We appreciate you joining us I will provide remarks on our high level results and operations before turning it over to Glenn to cover our financial results in greater detail.
Speaker 3: The results we announced today further illustrate the power of Webster in terms of earnings potential as well as our sound operating and risk profile. We continue to enhance our liquidity position and in contrast to broader industry trends we grew deposits by $1.6 billion. We also grew our net interest income and materially expanded net interest margin in the quarter.
The results, we announced today further illustrate the power of Webster in terms of earnings potential as well as our sound operating and risk profile, we continue to enhance our liquidity position and in contrast to broader industry trends. We grew deposits by $1 6 billion. We also grew our net interest income and materially expanded net interest.
In the quarter.
Speaker 3: In the quarter, we also completed our core systems conversion, marking a significant milestone in our integration, and we are pleased with the outcome and did so with limited client disruption.
In the quarter. We also completed our core systems conversion, marking a significant milestone in our integration and we are pleased with the outcome and did so with limited client disruption our streamlined technology architecture will allow us to further enhance client experience and more efficiently deliver for our clients in the future achieving this outcome took an exceptional effort.
Speaker 3: Our streamlined technology architecture will allow us to further enhance client experience and more efficiently deliver for our clients in the future.
Speaker 3: Achieving this outcome took an exceptional effort on the part of our colleagues, particularly our client facing colleagues and those dedicated to the conversion. I want to express the gratitude of our executive team, directors and shareholders for their efforts.
On the part of our colleagues, particularly our client facing colleagues and those dedicated to the conversion I want to express the gratitude of our executive team directors and shareholders for their efforts.
Speaker 3: With the core conversion complete, we expect our company's financial potential will become even more evident over the near to medium term. And we will have significantly more opportunity to build upon our operating capabilities going forward, including services that allow us to enhance non-interest income in our commercial, consumer, and HSA business.
With the core conversion complete we expect our company's financial potential will become even more evident over the near to medium term and we will have significantly more opportunity to build upon our operating capabilities going forward, including services that allow us to enhance noninterest income in our commercial consumer and HSA businesses. Furthermore, our colleagues will do.
Speaker 3: Furthermore, our colleagues will direct their full attention to continuing to grow the organization as they deepen existing and develop new client relationships, enhance our product capabilities and client service, raise Webster's Market Profile and keep operations running smoothly.
Their full attention to continuing to grow the organization as they deepen existing and develop new client relationships enhance our product capabilities and client service right Webster's market profile and keep operations running smoothly.
Speaker 3: With that as an introduction, I'll get into our financial highlights for the quarter. I'll start on slide two. On an adjusted basis, we generated EPS of $1.55 with solid results across nearly all of our income statement lines.
With that as an introduction I'll get into our financial highlights for the quarter I'll start on slide two on an adjusted basis, we generated EPS of $1 55 with solid results across nearly all of our income statement lines and <unk> grew 2% from the prior quarter. This generated an adjusted return on assets.
Speaker 3: and PPR grew 2% from the prior quarter. This generated an adjusted return on assets of nearly 1.5% and an adjusted return on tangible common equity of 21%.
Nearly one 5% and an adjusted return on tangible common equity of 21%.
Speaker 3: Our efficiency ratio remained at 42% among the best in the industry.
Our efficiency ratio remained at 42% among the best in the industry.
Speaker 3: We grew our deposits by almost 3% over prior quarter, and we were able to grow net interest income despite a decline in loans.
We grew our deposits by almost 3% over prior quarter, and we were able to grow net interest income despite a decline in loans.
Speaker 3: As we have discussed in our prior calls and at our investor day in March, we've continued to evaluate our capital allocation and the risk return dynamics across lending businesses since our merger closed nearly two years ago. We've discussed with many of you that the time would come to deemphasize some businesses where our resources and capital could be better allocated.
We have discussed in our prior calls and at our Investor Day in March we've continued to evaluate our capital allocation and the risk return dynamics across lending businesses. Since our merger closed nearly two years ago. We have discussed with many of you that the time would come to deemphasize, some businesses, where our resources and capital could be better allocated.
Speaker 3: And we are starting to see some of that today, particularly in an environment where liquidity is at a premium and the credit environment remains uncertain. In the quarter, we focused our own origination efforts on franchise building full relationships, C&I and non-office commercial real estate. We purposely deemphasized our mortgage warehouse activities, where balances materially decline.
And we are starting to see some of that today, particularly in an environment, where liquidity is at a premium and the credit environment remains uncertain in the quarter, we focused our loan origination efforts on franchise building full relationship C&I and non office commercial real estate, we purposely de emphasized our mortgage warehouse activities where balances.
Really declined.
Speaker 3: As a result of our deposit growth and more targeted loan origination activities, our loan to deposit ratio improved to 83% providing us a ton of flexibility as we move forward. We have a solid loan pipeline and feel good about our ability to continue to safely grow earning assets even with a backdrop of sluggish loan.
As a result of our deposit growth in more targeted loan origination activities, our loan to deposit ratio improved to 83%, providing us a ton of flexibility as we move forward, we have a solid loan pipeline and feel good about our ability to continue to safely grow earning assets, even with the backdrop of sluggish loan demand.
Speaker 3: Our common equity tier one ratio and TCE ratio are strong at 11.2% and 7.2% respectively.
Our common equity tier one ratio and TCE ratio are strong at 11, 2% and seven 2%, respectively. Our robust capital position and returns provide us a great deal of flexibility and Optionality in terms of capital deployment, whether it be organic growth share repurchases payment on our common dividend.
Speaker 3: A robust capital position in returns provide us a great deal of flexibility and optionality in terms of capital deployment, whether it be organic growth, sharey purchases, payment on our common dividend, or in selective instances, executing on complementary acquisitions such as the interlink and bend transactions that we've executed on over the last two years.
Or in selective instances executing on complementary acquisitions, such as the interlink and been transactions that we've executed on over the last two years.
Speaker 3: On slide three, we again provide a profile of our diverse and unique deposit funding. Many of you have seen this slide a few times now, but we'd like to highlight what we believe to be one of our key competitive advantages, particularly as deposits exit the banking.
On slide three we again provide a profile of our diverse and unique deposit funding. Many of you have seen this slide a few times now, but we'd like to highlight what we believe to be one of our key competitive advantages, particularly as deposits exit the banking system. The deposit growth. We generated this quarter was a team effort with most of these channels contributing.
Speaker 3: The deposit growth we generated this quarter was a team effort with most of these channels contributing and Glem will provide more details on our deposit growth shortly.
And Glenn will provide more details on our deposit growth shortly.
Speaker 3: This business profile also enables our robust liquidity position, which we review on the following slide, slide four. We again increased our immediately available liquidity to 19.8 billion from 18 billion last quarter. In the most recent quarter, our uninsured deposits fell to 22% of total from 25% last quarter. And our liquidity coverage of those uninsured deposits grew to 148% versus 124% last quarter.
This business profile also enables our robust liquidity position, which we review on the following slide slide four we again increased our immediately available liquidity to $19 8 billion from $18 billion last quarter and the most recent quarter, our uninsured deposits fell to 22% of total from 25% last.
Quarter, and our liquidity coverage of those uninsured deposits grew to 148% versus 124% last quarter.
Speaker 3: I'll touch on our office Cree portfolio and credit in general as we turn to slide five. Office loan exposure continues to be a focus of our conversations with investors and we continue to actively manage our risk in that asset class.
I'll touch on our office creep portfolio and credit in general as we turn to slide five office loan exposure continues to be a focus of our conversations with investors and we continue to actively manage our risk in that asset class, notably we proactively reduced our office exposure, which is now under $1 2 billion.
Speaker 3: Notably, we've proactively reduced our office exposure, which is now under 1.2 billion or 2.3% of loan.
Or two 3% of loans, including actions taken this quarter, we have reduced the portfolio by $500 million since the second quarter of 2022 or 30% of the original balance the portfolio is generally well secured with an at origination weighted average LTV of 54% and our current debt service.
Speaker 3: Including actions taken this quarter, we reduced the portfolio by $500 million since the second quarter of 2022, or 30% of the original balance.
Speaker 3: The portfolio is generally well secured with an at-origination weighted average LTV of 54% and a current debt service coverage ratio of 1.9 times.
Average ratio of one nine times no delinquencies in the portfolio in a low level of non accruing assets.
Speaker 3: No delinquencies in the portfolio and a low level of non accruing <expletive> .
Speaker 3: Note that of the remaining portfolio, almost two-thirds of our exposure has some level of tertiary support in the form of a guarantee or reserve.
Note that of the remaining portfolio almost two thirds of our exposure has some level of tertiary support in the form of a guarantee or reserve.
Speaker 3: Overall, while it's clear that the credit environment remains uncertain and that the industry trends indicate some level of bumpiness as we move forward, we remain generally pleased with the resilience and credit metrics in our existing loan portfolio.
Overall, while it's clear that the credit environment remains uncertain and that the industry trends indicate some level of bumping. This as we move forward. We remain generally pleased with the resilience and credit metrics in our existing loan portfolio, while our commercial classifieds increased in the quarter, they remain well below pre pandemic levels or not.
Speaker 3: While our commercial classifies increased in the quarter, they remain well below pre-pandemic levels. Our non-performing loans and charge-rups remain stable, and it's historically favorable.
Performing loans and charge offs remained stable and at historically favorable levels, we continue to add to our overall allowance for credit losses, and our 127% coverage of loans and leases compares favorably to peers. We continue to proactively manage credit exposure in our portfolio to ensure early identification of <unk>.
Speaker 3: We continue to add to our overall allowance for credit losses and our 1.27% coverage of loans and leases compares favorably to peers. We continue to proactively manage credit exposure in our portfolio to ensure early identification of problem credit.
<unk> credits.
Speaker 3: I'll now turn it over to Glenn to provide more details on the course.
I'll now turn it over to Glenn to provide more details on the quarter.
Speaker 2: Thanks, John , and good morning, everyone. I'll start on slide six with our GAP and adjusted earnings. We reported GAP net income, the common shareholders, of 222 million with earnings per share of $1.28. On an adjusted basis, we reported net income, the common shareholders of 267 million, an EPS of $1.55, excluding 62 million in pre-tax, merger-related,
Thanks, John and good morning, everyone I'll start on slide six with our GAAP and adjusted earnings we reported GAAP net income to common shareholders of $222 million with earnings per share of $1 28 on an adjusted basis. We reported net income to common shareholders of 267 million and EPS of $1 55.
Excluding $62 million in pre tax merger related expense.
Speaker 2: Merger-related charges were associated with our core conversion, which was completed in a third quarter and will decline significantly in the fourth quarter.
Merger related charges were associated with our core conversion, which was completed in the third quarter and will decline significantly in the fourth quarter.
Speaker 2: Next, I will review our balance sheet trends beginning on slide 7.
Next I will review our balance sheet trends beginning on slide seven.
Speaker 2: Total assets were 73 billion at period end down 900 million from the second quarter. Interest bearing deposits, primarily cash held at the Fed, was 1.8 billion at period end. We averaged 1.2 billion in cash for the quarter in line with what we anticipate going forward. Our security balances were relatively flat in the quarter as we reinvested proceeds from demands of the nYeah green free pool trip produced and imgame healthcare was our own internal
Total assets were <unk> 73 billion at period end down $900 million from the second quarter interest bearing deposits, primarily cash held at the fed was $1 8 billion at period end.
Average $1 2 billion in cash for the quarter in line with what we anticipate going forward are.
Our security balances were relatively flat in the quarter as we reinvested proceeds from maturities and sales.
Speaker 2: Lones were down 1.5 billion reflective of a false lower loan demand and a decline in non-strategic loan category.
Loans were down $1 5 billion reflective of both lower loan demand and a decline in non strategic loan categories.
Speaker 2: The positive group, 1.6 billion in a quarter, and would reduce the borrowings by 2.6 billion.
<unk> grew $1 6 billion in the quarter and we reduced borrowings by $2 6 billion.
Speaker 2: The deposit growth was across several product types and business lines, including over 250 million in non-interest bearing deposit growth.
Deposit growth was across several product types and business lines, including over $250 million and noninterest bearing deposit growth.
Speaker 2: Our loan to deposit ratio was 83% in the quarter, down from 88% last quarter, and we anticipate operating in the mid-80s going forward.
Our loan to deposit ratio was 83% in the quarter down from 88% last quarter and we anticipate operating in the mid <unk> going forward.
Speaker 2: Our capital levels are consistently strong. The Common Equity Tier 1 ratio was 11.2%, and our tangible Common Equity ratio was 7.
Our capital levels are consistently strong common equity tier one ratio was 11, 2% and our tangible common equity ratio was seven 2%.
Speaker 2: Tengible book value decreased to $29.48 per share, reflecting the impact of AOCI, the dividend, a small share repurchase. This was partially offset by RetainDern.
Tangible book value decreased to $29 48 per share, reflecting the impact of OCI the dividend a small share repurchase this was partially offset by retained earnings.
Speaker 2: Unrealized security losses, including included intangible book value, increased the 819 million aftertacks from 645 million last quarter, driven by higher rates.
Unrealized security losses, including included intangible book value increased to $819 million after tax from $645 million last quarter, driven by higher rates and.
Speaker 2: In a steady, interest rate environment, we anticipate roughly 125 million of this would creep back into capital annually.
In a steady interest rate environment, we anticipate roughly $125 million of this would accrete back into capital annually.
Loan trends are highlighted on slide eight in total loans were down by $1 5 billion or 3% on a linked quarter basis. The.
Speaker 2: Total loans were down by 1.5 billion or 3% on a linked quarter base.
Speaker 2: Commercial bank continues to drive loan trends, where declines were reflective of both lower demand and declines in non-strategic categories. Mortgage warehouse was down 600 million. Commercial real estate was down 100 million as we continued to reduce our office exposure, and C&I was lower by 900 million. The yield on the loan portfolio...
The commercial bank continues to drive loan trends, where declines were reflective of both lower demand and declines in non strategic categories mortgage warehouse was down $600 million commercial real estate was down $100 million as we continued to reduce our office exposure and C&I was lower by $900 million the yield on the loan portfolio increased 14 base.
This points and floating and periodic loans were 59% of total loans at quarter end.
Speaker 2: floating in periodic loans were 59% of total loans at quarter end.
Speaker 2: We provide additional detail on deposits on slide 9, with total deposits of 1.6 billion from prior quarter or 2.7%.
We provide additional detail on deposits on slide nine with total deposits of $1 6 billion from prior quarter or two 7% we saw growth in all major deposit categories with the exception of savings.
Speaker 2: We saw growth in all major deposit categories with the exception of savings.
Speaker 2: Growth was aided by the seasonal inflow in public funds, along with growth in interlink, commercial, and HSS.
Growth was aided by the seasonal inflow in public funds along with growth in interlink commercial in HSA.
Speaker 2: In our commercial business, we continue to recapture balances that have left in search of diversity earlier this year, as well as new clients.
In our commercial business, we continue to recapture balances that had less in search of diversity earlier this year as well as new clients.
Our total deposit costs were up 24 basis points to 196 basis points for accumulative cycle to date total deposit beta of 37%.
Speaker 2: On flight 10, we have updated the forward progression of our deposit beta assumptions. We anticipate our cycle to date beta will reach 40% in the fourth quarter of this year.
On slide 10, we have updated the forward progression of our deposit beta assumptions, we anticipate our cycle to date beta will reach 40% in the fourth quarter of this year.
Speaker 2: While the macro data has pushed out the interest rate cycle, we would still anticipate a beta in the low to mid-40s by the middle of 2024. Our expectations here align with our outlook for what we assume no further fed increases at this point with cuts beginning at the back gap of 2024.
While the macro data has pushed out the interest rate cycle, we would still anticipate a beta in the low to mid <unk> by the middle of 2024, our expectations here are aligned with our outlook for which we assume no further fed increases at this point with cuts beginning at the back half of 2024.
Moving to slide 11, we highlight our reported to adjusted income statement compared to our adjusted earnings for the prior period overall adjusted net income was up $7 million over prior quarter net interest income was up $3 3 million as we continued to benefit from our asset sensitive balance sheet adjusted noninterest income was flat.
Speaker 2: But just that non-interested income was flat, while expenses were down 2.3 million. We also benefited from a lower tax rate, 20.1% this quarter, down from 21.7% in the second quarter. Partially offsetting these trends, the provision was up five million.
While expenses were down $2 3 million. We also benefited from a lower tax rate, 21% this quarter down from 21, 7% in the second quarter, partially offsetting these trends the provision was up $5 million.
Speaker 2: The net interest margin was 3.49% of 14 basis points from the prior quarter. The NIM benefited from more normalized unbalanced sheet liquidity, as well as our asset sensitive position. And our efficiency ratio was 42%. On slide 12, we highlight net interest.
The net interest margin was 349% up 14 basis points from the prior quarter. The NIM benefited from more normalized on balance sheet liquidity as well as our asset sensitive position and our efficiency ratio was 42%.
On slide 12, we highlight net interest income, which grew $3 3 million linked quarter.
Speaker 2: Net interest margin increased 14 basis points from the prior quarter. Our yield on earning assets increased 17 basis points from the prior quarter. And the pace of deposit pricing moderated to 24 basis.
Net interest margin increased 14 basis points from the prior quarter, our yield on earning assets increased 17 basis points from the prior quarter and the pace of deposit pricing moderated to 24 basis points.
Speaker 2: It's important to note that our total cost of funds were up just four bases.
It is important to note that our total cost of funds were up just four basis points as growth in core deposit categories was used to replace wholesale funding and brokerage Cds.
Speaker 2: as growth in core deposit categories was used to replace wholesale funding and brokerage seats.
Speaker 2: On slide 13, we highlight our non-interest income, which was flat to prior quarter. An increase in derivative valuation and direct investment gains was offset by declines and deposit services.
On slide 13, we highlight our noninterest income, which was flat to prior quarter and increase in derivative valuation and direct investment gains was offset by declines in deposit service fees transaction activity tied to commercial clients remained slow in the third quarter. So the outlook is improving into next year.
Speaker 2: Transaction activity tied to commercial clients remains slow in the third quarter, though the outlook is improving into next-
Speaker 2: The year-over-year decrease was primarily driven by 10 million and lower client deposit fees. 7 million low-
The year over year decrease was primarily driven by $10 million and lower client deposit fees $7 million lower loan related fees $4 million from the outsourcing of the consumer investment service platform and lower client hedging activity.
Speaker 2: 4 million from the outsourcing of the Consumer Investment Service platform and lower client
Speaker 2: Non-interest expenses on 514. Re-reported adjusted expenses of 301 million, down 2 million from the prior quarter. Reductions in professional fees, occupancy, and marketing were partially offset by higher employee benefits and technology.
Noninterest expenses on slide 14, we reported adjusted expenses of $301 million down down 2 million from the prior quarter.
<unk> and professional fees occupancy and marketing were partially offset by higher employee benefits and technology expense.
Speaker 2: Slide 15 details components of our allowance for credit loss, which were up 6 million over prior quarter. After recording 29 million in net charge offs, we incurred a 36 million provision expense for macro-owned credit factors, partially offset by the impact of lower loans.
Slide 15 details components of our allowance for credit losses, which were up $6 million over prior quarter.
After recording 29 million of net charge offs, we incurred a $36 million provision expense for macro and credit factors, partially offset by the impact of lower loan balances as a result, our allowance coverage to loans increased to 127 basis points from 122 basis points last quarter.
Speaker 2: As a result, our allowance covers to loans increased to 127 basis points from 122 basis points last quarter.
Slide 16 highlights our key asset quality metrics on the upper left nonperforming assets are flat to prior quarter and prior year with nonperforming loans, representing just 43% of loans.
Speaker 2: On the upper left, non-performing assets are flat to prior quarter and prior year, with non-performing loans representing just 43% of loans.
43 basis points of loans.
Speaker 2: Commercial classified loans is a percent of commercial loans increased to 174 basis points from 139 basis points. As classified loans increased by 118 million on an absolute basis.
Commercial classified loans as a percent of commercial loans increased to 174 basis points from 139 basis points as classified loans increased by $118 million on an absolute basis. The balance was up as we saw a migration of a few larger credits that we expect to cure overtime.
Speaker 2: The balance was up as we saw migration of a few larger credits that we expect the cure over time.
Speaker 2: Net charge offs in the upper right total 29 million or 23 basis points of average loans.
Net charge offs in the upper right totaled $29 million or 23 basis points of average loans on an annualized basis, we divested another $78 million in office loans in the quarter. These divestitures generated $13 million of the $29 million and net charge offs.
Speaker 2: He divested another 78 million in office loans in the quarter. These divestitures generated 13 million of the 29 million in net charge of.
Speaker 2: Worth repeating, our total office exposure declined 110 million inclusive of other actions this quarter.
Worth repeating our total office exposure declined $110 million inclusive of other actions this quarter.
Speaker 2: On 517, we maintain strong capital levels. All capital levels remain in excess of regulatory and internal targets. Our Common Equity Tier 1 ratio is 11.2% and our tangible Common Equity ratio is 7.2%
On slide 17, we maintained strong capital levels, all capital levels remain in excess of regulatory and internal targets. Our common equity tier one ratio was 11, 2% and our tangible common equity ratio was seven 2% our tangible book value was $29 48 a share.
Speaker 2: Book value was $29.48 of share.
Speaker 2: including the AFS mark on our securities portfolio, our common equity tier one ratio would be approximately 9.5% as of September 30.
Including the best Mark on our Securities portfolio, our common equity tier one ratio would be approximately nine 5% as of September 30.
Speaker 2: I'll wrap up my comments on slide 18 with our fourth quarter outlook. We expect loans to grow in the range of 1 to 2% with growth focused in
I'll wrap up my comments on slide 18, with our fourth quarter outlook, we expect loans to grow in the range of 1% to 2% with growth focused in strategic segments. We expect core deposits to be in a range of third quarter with a year end loan to deposit ratio in the mid <unk>. We expect net interest income of $580 million to 590.
Speaker 2: which specced core deposits to be in a range of third quarter with a year-end loaned deposit ratio in the mid-A.
Speaker 2: We expect net interest income of 580 million to 590 million on a non-FTE base.
On a non FTE basis, and excluding accretion approximately $4 million in accretion would be added to the interest income outlook and for those modeling net interest income on an FTE basis, I would read added roughly $17 million to the outlook on.
Speaker 2: excluding accretion. Approximately 4 million in accretion would be added.
Speaker 2: and for those modeling, net interest income on an FTE basis, I would read, add roughly 17 million to the outlook. Our net interest income outlook assumes no further fed increases. The current...
Our net interest income outlook assumes no further fed increases we currently expect NIM to be flat to the third quarter.
Speaker 2: Non-interesting comes should be approximately 90 million. Core expenses are expected to be around 305 million, with an efficiency ratio in a range of 42.
Noninterest income should be approximately $90 million core expenses are expected to be around $305 million with an efficiency ratio in the range of 42% our expense outlook excludes the FDIC special assessment, we expect an effective tax rate of 21% will continue to be prudent managers of capital and.
Speaker 2: Our expense outlook excludes the FDIC special assessment. We expect an effective tax rate.
Speaker 2: Continue to be prudent managers of the capital and target a common equity tier one ratio of 10.5%. With that, I'll turn.
Target of common equity tier one ratio of 10, 5%.
With that I'll turn it back to John for closing remarks.
Speaker 3: Thanks, Aloklan. As I wrap up my remarks, I want to hit on the implications of the proposed regulatory changes for banks in excess of $100 billion in asset.
Thanks, a lot Glenn as I wrap up my remarks, I want to hit on the implications of the proposed regulatory changes for banks in excess of $100 billion in assets as it is among the topics where most frequently asked about we anticipate it will be several years before we reached the asset threshold at which the proposed regulations would impact Webster during that time, both the application of the.
Speaker 3: As it's among the topics we're most frequently asked about, we anticipate it'll be several years before we reach the asset threshold at which the proposed regulations would impact Webster. During that time, both the application of the regulations and the operating environment may significantly change.
<unk> and the operating environment may significantly change as you would expect we have already begun to build the necessary capabilities talent and investment to tackle the enhanced enhanced risk framework requirements that may apply to us as we approach a 100 billion just as we have tackled the occ's heightened standards requirements that came with crossing the $50 billion threshold.
Speaker 3: As you would expect, we've already begun to build the necessary capabilities, talent, and investment to tackle the enhanced risk framework requirements that may apply to us as we approach 100 billion, just as we have tackled the OCC's heightened standards requirements that came with crossing the $50 billion threshold.
Speaker 3: While there will likely be increased financial burdens such as required debt issuance and compliance costs, there could be several paths to absorbing and overcoming these challenges, including our increased scale and earnings power. In the near term, we believe our size brings a unique mix of scale and agility relative to many of our regional bank peers. We'll utilize our strong operating position to grow in our key markets and business lines, allocating our resources to the highest return opportunities all within a disciplined risk management frame.
While there will likely be increased financial burdens, such as required debt issuance and compliance cost there could be several paths to absorbing and overcoming these challenges, including our increased scale and earnings power in the near term. We believe our size brings a unique mix of scale and agility relative to many of our regional bank peers will utilize our strong operating <unk>.
<unk> to grow in our key markets and business lines allocating our resources to the highest return opportunities all within a disciplined risk management framework with that I want to wrap up my comments by saying. Thank you to all our colleagues for their strong efforts both in moving our strategy forward completing the conversion and getting us to where we are today.
Speaker 3: With that, I want to wrap up my comments by saying thank you to all our colleagues for their strong efforts, both in moving our strategy forward, completing the conversion, and getting us to where we are today. Operator with that, Glen and I will open up the line.
Operator, with that Glenn and I will open up the line to questions.
Speaker 1: Thank you. If you have a question, please press star one on your telephone keypad. If you wish to remove yourself from the Q Simply Press star one again. One moment for your first question.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again, one moment for your first question.
Yes.
Speaker 1: Your first question comes from the line of Chris McGrady of Keith Brier and Woods. Your line is open.
Your first question comes from the line is Chris Mcgrady.
Bret and Woods your line is open.
Oh, great good morning.
Okay great.
Speaker 4: John , maybe a high level question. This ongoing D-Risking that you've been doing, I guess where are you in terms of like how much more do you think you need to do? I mean, the law straights on the office, the implied law straights on the office from this quarter looks a bit higher than what you've been doing for the last several quarters. Just kind of big picture, where are you in terms of D-Risking, you know, the book.
Hey, John maybe maybe a high level question just this ongoing derisking that you've been doing I.
I guess, where are you in terms of like how much more do you think you need to do.
I mean, the loss rates on the office the implied loss rates on the office from this quarter looks.
A bit higher than what <unk> been doing for the last several quarters can you just kind of big picture, where are you in terms of Derisking the book.
Speaker 3: Yeah, it's interesting. I don't think Chris, there's kind of a dedicated timeline. I think we're, as you heard me say, the Billion II in office we have right now, we sort of feel good about with respect on a relative basis to...
Yes, it's interesting I don't think Chris there is kind of a.
<unk> timeline I think we're as you heard me say the $1 billion to an office, we have right now we sort of feel good about with respect on a relative basis too.
Speaker 3: having, you know, getting credit enhancements, continuing to work on the portfolio. So for us, it's looking at loans, looking at the strategic nature of them, whether they're with.
Having getting credit enhancements continuing to work on the portfolio. So for US. It's it's looking at loans looking at the strategic nature of them, whether they're with.
Speaker 3: You know investors and clients that we know very well that we're going to continue doing business with whether they're standalone Transactional what the kind of metrics and dynamics are and then each quarter, you know Jason and the team sit down and say Hey, we even though this may not be a problem now This is something that's not strategic for us or we have an opportunity at a reasonable economic cost
Investors and clients that we know very well that we're going to continue doing business with whether they're standalone transactional what the kind of metrics and dynamics are and then each quarter, Jason and the team sit down and say hey, we even though this may not be a problem. Now. This is something that is not strategic for us or we have an opportunity at a reasonable economic cost to <unk>.
Speaker 3: to move down. So we're not really looking at a serial reduction in the exposure, we're being opportunistic.
Move down so.
We're not really looking at our cereal reduction in the exposure, we're being opportunistic and we're making I think the right economic decisions because many of these loans are going to refinance find theyre going to pay off fine some of which we think in the future may have some problems just given the paradigm shift, but I think youll see us continue at this level.
Unknown Executive: Good morning. Welcome to Webster Financial's third quarter 2023 earnings call. His note this event is being recorded.
Speaker 3: And we're making, I think, the right economic decisions, because many of these loans are going to refinance fine. They're going to pay off fine, some of which, you know, we think in the future may have some problems just given the paradigm shift. But I think you'll see us continue at this level.
Emlen Harmon: I would now like to introduce Webster's Director of Investur 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 and the presentation and the company management remarks can be found on the company's investor relations website at investors.websterbank.com.
Speaker 3: you know looking at a twenty five million dollar seventy five million dollar portfolio or book a business in the quarter and if there's a good economic uh... strategic way to to exit those credits we will but you know we're not kind of
<unk> looking at a $25 million $75 million portfolio, our book of business in the quarter and if there's a good economic strategic way to exit those credits, we will but we're not kind of urgently and in a serial fashion trying to get rid of the exposure.
Speaker 3: urgently and in a cereal fashion trying to get rid of the exposure.
Speaker 4: OK. That's a lot. May they Bush.
Okay.
Okay.
Maybe Glenn.
Speaker 4: You gave the alone deposit and expectations to the balance. How should we be thinking about just the level of borrowings and security growth from here or decline?
You gave the loan to deposit.
Expectations for the balance sheet, how should we be thinking about just the level of borrowings.
Jon Ciulla: I'll now turn it over to Webster Financial CEO, Jon Ciulla. Thanks, Emlen. Good morning and welcome to Webster Financial Corporation's third quarter 2023 earnings call. We appreciate you joining us. 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 results we announced today further illustrate the power of Webster in terms of earnings potential as well as our sound operating and risk profile.
And securities growth from here or decline.
Speaker 2: So I think I'll take securities first. So we're like 14, 14 and a half million, I think you would expect it over the course of the next couple quarters to stay with.
So I think I'll take securities first so we were like 14% 14 $5 billion. I think you would expect expected over the course of say the next couple of quarters to stay within that range, depending on loan growth.
Speaker 5: depending on long growth. The question on borrowing.
The question on borrowings as I think I think we're at a level right now, we'd probably expect to be pretty flat.
Speaker 5: I think we're at a level right now where we'd probably expect to be pretty flat to the two.
Jon Ciulla: We continued to enhance our liquidity position and in contrast to broader industry trends, we grew deposits by $1.6 million. We also grew our net interest income and materially expanded net interest margin in the quarter. In the quarter, we also completed our core systems conversion, marking a significant milestone in our integration and we are pleased with the outcome and did so with limited client disruption. Our streamlined technology architecture will allow us to further enhance client experience and more efficiently deliver for our clients in the future.
To say two two plus billion Mark.
Okay, and maybe last one.
Speaker 6: And maybe the last one, one of your peers turned the buyback back on this quarter. I'm interested in your updated thoughts on whether buybacks at this point of that cycle make...
One of your peers turned to buyback back on this quarter.
I'm interested in your updated thoughts on whether buybacks at this point of the cycle makes sense.
Speaker 3: Chris, I think it's a great question. We bought back $50 million in the quarter in Q3. We clearly have capital levels and capacity to generate capital to continue the program. I would tell you that we're looking at.
Yes, Chris I think it's a great question, we bought back $50 million in the quarter in Q3.
We clearly have capital levels and capacity to generate capital to continue the program I would tell you that.
Jon Ciulla: Achieving this outcome took an exceptional effort on the part of our colleagues, particularly our client facing colleagues and those dedicated to the conversion. I want to express the gratitude of our executive team directors and shareholders for their efforts. With the core conversion complete, we expect our company's financial potential will become even more evident over the near to medium term and we will have significantly more opportunity to build upon our operating capabilities going forward, including services that allow us to enhance non-interest income in our commercial consumer and HSA businesses.
We're looking at this from a position of having good flexibility, but also recognizing.
Speaker 3: this from a position of having good flexibility, but also recognizing that we wanna make sure that we have capital if we do a tuck-in acquisition, if we do grow loans significantly, if we see cracks in the market from a credit perspective. So I guess the way I would characterize it is I wouldn't rule it out, but I think we're being a little bit more cautious as we look in the fourth quarter to our activities in that area.
That we want to make sure that we have capital if we do tuck in acquisition, if we do grow loans significantly if we see cracks in the market from a credit perspective, So I guess the way I would characterize it is I wouldn't rule it out.
But I think we're being a little bit more cautious as we look in the fourth quarter to our activities in that area.
Okay. Thanks, Thanks, a lot.
Jon Ciulla: Furthermore, our colleagues will direct their full attention to continuing to grow the organization as they deepen existing and develop new client relationships, enhance our product capabilities and client service, raise Webster's market profile and keep operations running smoothly.
Thank you.
Speaker 1: Your next question comes from line of Casey Hare of Jeffries. Your line is open.
Your next question comes from the line of Casey Haire of Jefferies. Your line is open.
Yes, thanks, good morning, everyone.
Speaker 6: just phone up, I guess, Glenn on the NIM. So NIM is going to be flat in the fourth quarter and borrowings which obviously helped in the third quarter that the client there, sounds like they're going to be flat. So what is the offset to...
Just following up I guess, Glenn on the NIM. So.
NIM is going to be flat in the fourth quarter and borrowings, which obviously helped in the third quarter. The decline there it sounds like theyre going to be flat. So what is the offset too.
Jon Ciulla: With that as an introduction, I'll get into our financial highlights for the quarter. I'll start on slide two. On an adjusted basis, we generated EPS of $1.55, with solid results across nearly all of our income statement lines and PPR grew 2% from the prior quarter. This generated an adjusted return on assets of nearly 1.5% and an adjusted return on tangible common equity of 21%. Our efficiency ratio remained at 42% among the best in the industry.
Speaker 2: The beta creep that you expect to keep, to keep NIM flat, is it long growth? Just looking for a little color on what holds NIM stable in the portfolio. Yes, sure. So some of it is, some of it is long growth. Some of it is the rate on loans, where we get the full benefit of the periodic loans reprised.
Sure.
The beta creep that you expect to keep to keep NIM flat is it loan growth just looking for a little color on what holds NIM stable in the fourth.
Sure. So some of it is some of it is loan growth some of it's the rate on loans, where we get the full benefit of the periodic loans repricing.
Speaker 5: And then you do have, we do pick up one day, at least on an in basis from an earning standpoint. And then it's pretty much some of that's neutralized by what we think deposit growth will be, or deposit cost will be going into the fourth quarter. Like I said in my comments, we still think that there'll be the profit pressure going.
And then you do have.
Jon Ciulla: We grew our deposits by almost 3% over prior quarter and we were able to grow net interest income despite a decline in loans. As we have discussed in our prior calls and at our investor day in March, we've continued to evaluate our capital allocation and the risk return dynamics across lending businesses since our merger closed nearly two years ago. We've discussed with many of you that the time would come to deemphasize some businesses where our resources and capital could be better allocated and we are starting to see some of that today, particularly in an environment where liquidity is at a premium and the credit environment remains uncertain.
We don't pick up one day at least on an end basis from an earnings standpoint.
And then pretty much some of Thats neutralized by what we think deposit growth will be our deposit costs will be going into the fourth quarter.
Like I said in my comments, we still think that there is there'll be a deposit pressure going into into the fourth quarter, albeit very more moderate than it has been certainly in the last couple of quarters.
Speaker 5: I'll be at a very more moderate than it's been certainly in the last couple quarters.
Okay, Great and then just.
Speaker 7: Question on the funding strategy. I mean, your deposit growth was pretty broad-based. Interlink still is doing a lot of the heavy lifting. On that slide was it. Slide five. It's 9% of your deposit.
A question on the funding strategy.
Deposit growth was was pretty broad based.
Jon Ciulla: In the quarter, we focused our loan origination efforts on franchise building full relationships, CNI and non-office commercial real estate. We purposefully deemphasized our mortgage warehouse activities where balances materially declined. As a result of our deposit growth and more targeted loan origination activities, our loan to deposit ratio improved to 83% providing us a ton of flexibility as we move forward. We have a solid loan pipeline and feel good about our ability to continue to safely grow earning assets even with a backdrop of sluggish loans.
Interlink still is doing a lot of the heavy lifting.
On that slide was it slide five it's not it's 9% of your deposit.
Speaker 7: franchise, you know, what long term is there, is that a seal? Is there a ceiling that you have for interlink or is that is, you know, is 9% the right level just trying to figure out how big that can become?
Franchise, what long term is there is that a is there a ceiling that you have for interlink or is that is.
Is 9% below grade level, just trying to figure out how how big that can become.
Speaker 2: So, you know, we're in the process of doing our outlook over the next couple of quarters in actually years. So, you know, I think if we're at 9% now, depending on, you know, our sources of funds, and other sources of funds, we, you know, that could go plus...
So we're in the process of doing our outlook over the next couple of years.
Orders and actually years so.
I think if we're at 9% now depending on our sources of funds and other sources of funds that could go plus or minus.
Jon Ciulla: Manan. Our common equity to your one ratio and TCE ratio are strong at 11.2% and 7.2% respectively. Our robust capital position in returns provide us a great deal of flexibility and optionality in terms of capital deployment, whether it be organic growth, sharey purchases, payment on our common dividend, or in selective instances executing on complimentary acquisitions such as the interlink and vent transactions that we've executed on over the last two years. On slide three, we again provide a profile of our diverse and unique deposit funding.
Speaker 2: I, you know, it could go as high as 15%, but, you know, that's something that we're still in the process.
It could go as high as 15%.
That's something that we're still in the process of planning right now Casey.
Speaker 7: got it. Okay. Um, and just last one for me, uh, on the efficiency, you know, I know it's early for, for 24, but you guys, obviously, at that 42% are in, are in, you know, more efficient than, than most of my coverage universe. Uh, John , you mentioned, you know, you are, there are going to be some financial burdens about, you know, in getting the bank ready to be a hundred billion. What, um,
Got it okay.
And just last one for me on the efficiency.
I know it's early for 'twenty four but you guys. Obviously at 42% are in more efficient than most of my coverage universe.
John You mentioned you are that are going to be some financial burdens about and getting the bank ready to be $100 billion what.
What.
Speaker 7: Can you pass that along or is that something that you might let the efficiency ratio drip up?
Can you pass that along or is that.
Jon Ciulla: Many of you have seen this slide a few times now, but we'd like to highlight what we believe to be one of our key competitive advantages, particularly as deposits exit the banking system. The deposit growth we generated this quarter was a team effort with most of these channels contributing and Glenn will provide more details on our deposit growth shortly. This business profile also enables our robust liquidity position, which we review on the following slide, slide four.
Is that something that you're you might let the efficiency ratio drift up.
Speaker 3: Yeah, that's a good question. And again, at Glenn said, we're working through our plan now. And we're not going to sort of, we're not ready to provide guidance for 24. But I will tell you, our sense is, look, we still have some opportunity coming out of the conversion as we consolidate sub-ledgers and look at back office processes and consolidate call centers, which we still haven't completed.
Yes, it's a good question and again as Glenn said, we're working through our plan now and we're not going to sort of we're not ready to provide guidance for 'twenty four but I will tell you. Our sense is look we still have some opportunity coming out of the conversion as we consolidate sub ledgers and look at back office processes.
Jon Ciulla: We again increased our immediately available liquidity to 19.8 billion from 18 billion last quarter. In the most recent quarter, our uninsured deposits fell to 22% of total from 25% last quarter and our liquidity coverage of those uninsured deposits grew to 148% versus 124% last quarter.
And consolidate call centers, which we still haven't completed so Casey we do still have some.
Speaker 3: So Casey, we do still have some merger related cost opportunities, cost save opportunities, and I kind of like where we are.
Merger related cost opportunities cost save opportunities and I kind of like where we are our feeling is we also have opportunities to invest and grow, particularly if the market green lights with respect to loan growth and people feel comfortable about a soft landing I think we can identify additional teams in commercial banking to bring on where <unk>.
Speaker 3: Our feeling is we also have opportunities to invest and grow, particularly if the market green lights with respect to loan growth and people feel comfortable a lot of soft landing. I think we can identify.
Jon Ciulla: I'll touch on our office report folio and credit in general as we turn to slide five. Office loan exposure continues to be a focus of our conversations with investors and we continue to actively manage our risk in that asset class. Notably, we've proactively reduced our office exposure, which is now under 1.2 billion or 2.3% of loans. Including actions taken this quarter, we reduced the portfolio by $500 million since the second quarter of 2022 or 30% of the original balance.
Speaker 3: You know, additional teams and commercial banking to bring on. We're definitely investing in products and capital markets and FX and card and other commercial treasury products that will enhance our balance of non-interest income.
<unk> investing in products and capital markets, and FX and card and other commercial treasury products that enhance our balance of noninterest income. So our kind of view as we think we can operate steadily in the low <unk> efficiency ratio and to the extent, we can gain more cost savings that will.
Speaker 3: So our kind of view is we think we can operate steadily in the low 40s efficiency ratio and to the extent we can gain more cost savings that will it'll provide us an opportunity to invest in.
He will provide us an opportunity to invest in in in key products and services in people. So if we can continue to post the numbers that we promised when we did the merger that 20% ROE ATC the one five ROA.
Speaker 3: in key products and services and people.
Speaker 3: So, you know, if we can continue to post the numbers that we promised when we did the merger, the 20% ROATC, the one and a half ROA, and, you know, an efficiency ratio in the low-fifth.
Jon Ciulla: The portfolio is generally well secured with an at-origination weighted average LTV of 54% and a current debt service coverage ratio of 1.9 times. No delinquencies in the portfolio and a low level of non-accruing assets. Note that of the remaining portfolio, almost two-thirds of our exposure has some level of tertiary support in the form of a guarantee or reserve. Overall, while it's clear that the credit environment remains uncertain and that the industry trends indicate some level of bumpiness as we move forward, we remain generally pleased with the resilience and credit metrics in our existing loan portfolio.
And efficiency ratio in the low <unk>.
Speaker 3: I think size scale and momentum allow us to keep that efficiency ratio in the low 40s without starving the bank with respect to future investment. And then if you fast forward right three years, you look at the size of our balance sheet as we approach $100 billion, I think we'll have some...
Think size scale and momentum will allow us to keep that efficiency ratio in the low <unk> without starving the bank with respect to future investment and then if you fast forward three years, you look at the size of our balance sheet as we approach a $100 billion I think we will have some some optionality and we'll be in a better place than others, who are similarly, situated given how.
Speaker 3: some optionality and will be in a better place than others who are similarly situated, given how kind of efficient our operating model is.
Kind of efficient our operating model.
Great. Thank you.
Jon Ciulla: While our commercial classifies increased in the quarter, they remain well below pre-pandemic levels. Our non-performing loans and charge-rups remain stable and is historically favorable levels. We continue to add to our overall allowance for credit losses and our 1.27% coverage of loans and leases compares favorably to peers. We continue to proactively manage credit exposure in our portfolio to ensure early identification of problem credits.
Speaker 1: Your next question comes from a line of Matthew Briece of Steven Zink. Your line is open.
Your next question comes from the line of Matthew Breese of Stephens, Inc. Your line is open.
Hey, good morning.
Speaker 8: I know office BRE grabs a lot of the attention these days, but I was curious, thoughts and updated color on the sponsor specialty and leverage loan book. Those portfolios have been performing in a higher rate environment.
I know office CRE grabbed a lot of the attention these days, but I was curious.
Thoughts and updated color on the sponsor and specialty and leveraged loan book.
How are those portfolio has been performing.
Higher rate environment.
Speaker 3: Yeah Matt, you know, so far so good. We've talked about it before, you know, those companies that we under right there tend to have predictable, predictable.
Yes, Matt so far so good.
Talked about it.
Glenn MacInnes: I'll now turn it over to Glenn to provide more details on the quarter.
Before those companies that we underwrite there tend to have protective will predictable.
Glenn MacInnes: Thanks, John, and good morning, everyone. I'll start on slide six with our gap and adjusted earnings. We've reported gap net income in the common shareholders of 222 million with earnings per share of $1.28. On an adjusted basis, we reported net income in the common shareholders of 267 million and EPS of $1.55, excluding 62 million in pre-tax merger related Experience. Merger-related charges were associated with our core conversion, which was completed in a third quarter, and will decline significantly in the fourth quarter.
Speaker 3: cash flow streams, recurring cash flow streams, contractual cash flow streams, and so
Cash flow streams recurring cash flow streams contractual cash flow streams, and so we haven't seen a deterioration significant deterioration in the credit profile I'd say, it's behaving like the rest of the book, probably some level of moderate negative risk rating migration, but it hasnt spooked.
Speaker 3: We haven't seen a deterioration, significant deterioration in the credit profile. I'd say it's behaving like the rest of the book, probably some level of moderate negative risk rating migration, but it hasn't spooked us at all. And again, you know, I...
Spooked us at all and again.
Speaker 3: It's always hard to predict the future, but one of the wonderful things about that portfolio besides the type of companies that we lend to.
It's always hard to predict the future, but one of the wonderful things about that portfolio. Besides the type of companies that we lend to.
Speaker 3: you know are the private equity firms that we've been doing business with for you know ten and twenty years that are kind of flush with cash raising new funds and really not rediscent to you know capitulate and give up these really good company
Are the private equity firms that we've been doing business with for 10, and 20 years that are kind of flushed with cash raising new funds and really not reticent to capitulate and give up these really good companies. No question about the fact that these are floating generally floating rate loans. So their debt service has increased <unk>.
Glenn MacInnes: Next, I will review our balance sheet trends beginning on slide seven. Total assets were 73 billion, a period end down 900 million from the second quarter. Intersparing deposits, primarily cash held at the Fed, was 1.8 billion, a period end. We averaged 1.2 billion in cash for the quarter in line with what we anticipate going forward. Our security balances were relatively flat in the quarter as we reinvested proceeds from securities and sales.
Speaker 3: No question about the fact that these are floating, generally floating rate loans. So their debt service has increased. They generally are lower in contractual amortization. So really it's the...
Generally are lower in in contractual amortization, so really it's the interest expense.
Speaker 3: And so far, the capacity to continue to service that that has seemed strong, and obviously we feel comfort in the fact that we've got strong private equity firms.
And so far the capacity to continue to service debt at that has seen strong and obviously, we feel comfort in the fact that we've got strong private equity firms behind those companies in case things start to go sideways generally we work things through with them and the deals continue to perform so so far.
Glenn MacInnes: Loans were down 1.5 billion reflective of both lower loan demand and a decline in non-strategic loan categories. Deposits grew 1.6 billion in the quarter and reduced borrowings by 2.6 billion. The deposit growth was across several product types and business lines, including over 250 million in non-intersparing deposit growth. Our loan to deposit ratio was 83% in the quarter, down from 88% last quarter, and we anticipate operating in the mid-80s going forward.
Speaker 3: behind those companies in case things start to go sideways. Generally, we work things through with them and the deals continue to perform. So far, I'd say it's coming out according to the oil, which is they're able to service the increased interest rate cost and we seem to have pretty stable performance in that book.
I'd say its coming.
Coming out according to Hoyle, which is they are able to service the increased interest rate cost and we seem to have pretty stable performance in that in that book.
Speaker 8: And I just want to a reminder, what is the size of the, you know, what meets definition of leverage loans and then anything beyond that that would you consider, you know, a syndicated, a syndicated loan portfolio?
Glenn MacInnes: Our capital levels are consistently strong. The Common Equity Tier 1 ratio was 11.2%, and our tangible Common Equity ratio was 7.2%. Tangible book value decreased to $29.48 per share, reflecting the impact of AOCI, the dividend, a small share repurchase. This was partially offset by retained earnings. Unrealized security losses, including an intangible book value, increased to $819 million after tax from $645 million last quarter, driven by higher rates. In a steady interest rate environment, we anticipate roughly 125 million of this would accrete back into capital annually.
And then just a reminder, what is the size of the what meets definition of leveraged loans and then anything beyond that that would be considered a syndicated cindy.
Syndicated loan portfolio.
Yes.
Speaker 3: Yeah, this is, it's tricky because there's overlap everywhere, right? And we've reported on our regulatory, statutory, leverage loans. Those have actually remained relatively flat over the last couple quarters. It's about 6% of our total loan book are $3 billion. And most of that, as you intimated, is in our sponsor and specialty book.
It's tricky because there is overlap everywhere right and we've reported on our regulatory statutory leverage loans that those have actually remained relatively flat over the last couple of quarters. It's about 6% of our total loan book or $3 billion and most of that as you intimated.
Intimated in our sponsor and specialty book are shared national credits are.
Speaker 3: Our shared national credits are about 12% and there's some subset of that which is leveraged but about 12% of total loans.
12% and Theres, some subset of that which is leverage but about 12% of total loans that number is actually down from.
Glenn MacInnes: Loan trends are highlighted on slide 8. In total, loans were down by 1.5 billion or 3% on a linked quarter basis. The commercial bank continues to drive loan trends, where declines were reflective of both lower demand and declines in non-strategic categories. Mortgage warehouse was down 600 million, commercial real estate was down 100 million, as we continue to reduce our office exposure, and CNI was lower by 900 million. The yield on the loan portfolio increased 14 basis points, and floating in periodic loans were 59% of total loans at quarter end.
Speaker 3: That number's actually down from pre-merger Webster numbers as a percentage of total loans just given kind of the mix that came together between Webster and Sterling. Again, no kind of differentiated performance there. So.
Pre merger Webster numbers as a percentage of total loans, just given kind of the mix that came together between.
Webster in Sterling.
No kind of differentiated performance there so.
Speaker 3: I've told the story a million times to the street over the last 15 years about shared national credits. We don't have a buy side desk.
I've told this story a million times to the street over the last 15 years about shared national credits, we don't have a buy side desk, we're not a stuffy for the big banks or the non banks, who are syndicating out loans, our use of shared national credits over the last 15 years has been in strategy or in geography or in product.
Speaker 3: We're not a stuffy for the big banks or the non-banks who are syndicating out loans.
Glenn MacInnes: We provide additional detail on deposits on slide 9, with total deposits of 1.6 billion from prior quarter or 2.7%. We saw growth in all major deposit categories with the exception of savings. Growth was aided by the seasonal inflow in public funds, along with growth in interlink, commercial, and HSA. In our commercial business, we continue recapture balances that had left in search of diversity earlier this year, as well as new clients. Our total deposit costs were up 24 basis points to 196 basis points, for cumulative cycle to date total deposit data of 37%.
Speaker 3: Our use of shared national credits over the last 15 years has been in strategy or in geography or in product.
Speaker 3: Meaning that it's a middle market or corporate company within our middle market footprint where we have cross-sell opportunities direct access to management, but they have a $700 million credit facility, and certainly we don't have the balance sheet to provide that. So we'll participate in that credit and cross-sell. It's in our sponsor and specialty group where we have expertise and technology and other industry verticals where we'll strategically participate with access to management again.
Meaning that its a middle market or corporate company within our middle market footprint, where we have cross sell opportunities direct access to management, but they have a $700 million credit facility and certainly we don't have the balance sheet to provide that so we will participate in that credit and cross sell it's in our sponsor and specialty group, where we have expert.
Ts and technology and other industry verticals, where we will strategically participate with access to management again, we underwrite and portfolio manage all of our shared national credits exactly the same way, we do our bilateral credit and our shared national credit book has a weighted average risk rating of about.
Speaker 3: We underwrite and portfolio, manage all of our shared national credits exactly the same way we do a bilateral credit.
Glenn MacInnes: On slide 10, we have updated the forward progression of our deposit data assumptions. We anticipate our cycle to date data will reach 40% in the fourth quarter of this year. While the macro data has pushed out the interest rate cycle, we would still anticipate a beta in the low to mid-40s by the middle of 2024. Our expectations year align with our outlook for what we assume no further fed increases at this point, with cuts beginning at the back gap of 2024.
Speaker 3: And our Share National Credit book has a weighted average risk rating of about a full half a turn, 50 basis points better than the overall weighted average risk rating of our commercial portfolio, because those bigger companies tend to be more resilient and have more revenue streams. So those are the data points and I figured I'd share with you on how we go about underwriting and participating in Share National.
A full half a turn of 50 basis points better than the overall weighted average risk rating of our commercial portfolio because those bigger companies tend to be more resilient and have more revenue stream. So those are the data points and I figured I'd share with you our view on how we go about.
Underwriting and participating in shared national credits.
Glenn MacInnes: Moving to slide 11, we highlighted our reported to adjusted income statement, compared to our adjusted earnings for the prior period. Overall, adjusted income was up 7 million over prior quarter. Partially offsetting these trends, the provision was up 5 million. The net interest margin was 3.49% up 14 basis points from the prior quarter. The NIM benefited from more normalized unbalanced sheet liquidity as well as our asset sensitive position, and our efficiency ratio was 42%.
Speaker 8: So understanding it's likely a blend of, you know, the leverage on portfolio, probably some real estate in there is it's fair to assume the underwriting characteristics, like sponsoring special.
So understanding it's likely a blend.
The leveraged loan portfolio, probably some real estate in there is it fair to assume.
The underwriting characteristics.
Sponsor and specialty from a leverage perspective.
Speaker 8: are similar to that book and from a commercial real estate perspective or similar to the LTVs and death service coverage ratios. We find it. Yeah, I like.
Similar to that book and from a commercial real estate perspective were similar to the LTV and debt service coverage ratios, we find it yes.
Speaker 3: yeah i i think that's a fair statement but i'll also tell you we have very little shared national credit exposure in commercial real estate
Yes, I think Thats, a fair statement, but I will also tell you we have very little shared national credit exposure in commercial real estate.
Speaker 3: And I mean very little. Most of our shared national credit exposure is in.
And I mean, very little most of our shared national credit exposure is in sponsor and specialty in our middle market geography groups on mid corporate and large corporate relationships. We have and then we have some asset base lending those are the ones I worry about the lease those are two larger retailers.
Speaker 3: sponsor and specialty in our middle market geography groups on mid corporate and large corporate relationships We have and then we have some in asset-based lending those are the ones I worry about the least those are to you know larger retailers Strong agents cash to millions
Glenn MacInnes: On slide 12, we highlight net interest income, which grew 3.3 million linked quarter. Net interest margin increased 14 basis points from the prior quarter. Our yield on earning assets increased 17 basis points from the prior quarter, and the pace of the positive pricing moderated to 24 basis points. It's important to note that our total cost of funds were up just 4 basis points as growth in core deposit categories was used to replace wholesale funding and broker CDs.
Strong agents cash Dominion.
Speaker 3: You know, we generally don't have any problems with those transactions. So we don't have very much shared national credit exposure and commercial real estate. It's just not been one of our tools.
We generally don't have any problems with those transactions. So we don't have very much.
<unk> National credit exposure in commercial real estate has just not been one of our tools.
Speaker 8: Understood. Okay. Last one for me, John , you had mentioned
Understood Okay.
One for me John you had mentioned.
Speaker 8: you know, keeping capital handy for perhaps tuck-in acquisitions. I know historically it's been discussions around, you know, perhaps HSA tuck-in acquisitions, but I was curious if that comment meant anything broader is in whole banks or other sorts of fiend can be.
Keeping capital handy for perhaps tuck in acquisitions I know historically, it's been discussions around perhaps HSA tuck in acquisitions, but I was curious if.
That comment meant anything broader in whole banks or other sorts of fee income vehicles.
Glenn MacInnes: On slide 13, we highlight our non-interest income, which was flat to prior quarter. An increased in derivative valuation and direct investment gains was offset by declines in deposit service fees. Transaction activity tied to commercial clients remained slow in the third quarter, though the outlook is improving into next year. The year a year decrease was primarily driven by 10 million and lower client deposit fees, 7 million lower loan related fees, 4 million from the outsourcing of the consumer investment service platform, and lower client hedging activity.
Speaker 3: Yeah, I know a great question. And I think quite clearly means sort of complementary acquisitions around fee generating or deposit gathering businesses where we have a path to some organic growth but would like to enhance and speed up that path to get a better balance of non-interest income and interest income rather than...
No great question, and I think quite clearly means sort of complementary acquisitions around fee generating our deposit gathering businesses, where we have a path to some organic growth, but we'd like to enhance and speed up that path to get a better balance of noninterest income and interest income rather.
Speaker 3: a whole bank acquisition. We don't feel that right now. You know, you never say never. And I've learned my lesson there, but you know, given where we are, the great integration and conversion we just did, given the look at the dynamics in the marketplace, I would say.
Then a whole bank acquisition, we don't feel that right now you never say never.
I've learned my lesson there but.
Given where we are the great integration and conversion. We just did given the look at the dynamics in the marketplace I would say highly.
Glenn MacInnes: Non-interest expenses on slide 14 re-reported adjusted expenses of 301 million down 2 million from the prior quarter. Reductions in professional fees, occupancy, and marketing were partially offset by higher employee benefits and technology expense.
Speaker 3: highly unlikely, whole bank activity on the inorganic side, and it would be something that would be targeted on further low cost deposit gathering or fee generating businesses that are complementary to our existing activities. Great.
Highly unlikely whole bank activity on the inorganic side and it would be something that would be targeted.
Further low cost deposit gathering or fee generating businesses that are complementary to our existing activities.
Glenn MacInnes: Slide 15 details components of our allowance for credit loss, which were up 6 million over prior quarter. After recording 29 million in net charge offs, we incurred a 36 million provision expense for macro-owned credit factors, partially offset by the impact of lower loan balances. As a result, our allowance covers to loans increased to 127 basis points from 122 basis points last quarter.
Great.
I'll leave it there. Thank you for taking all my questions.
Thank you.
Speaker 1: Your next question comes from the line of Mark Fitzgibbon of Poverty Sandler. The line goes up.
Your next question comes from the line of Mark Fitzgibbon of Piper Sandler Your line is open hey.
Speaker 9: Hey guys, good morning. Glenn, I wanted if you could share your thoughts on restructuring or selling available for sale securities in the fourth quarter given that rates may be stuck up here for a while.
Hey, guys. Good morning, Glenmark I Wonder I Wonder if you could share your thoughts on restructuring or selling available for sale securities in the fourth quarter given that rates may be stuck up here for a while.
Glenn MacInnes: Slide 16 highlights our key asset quality metrics. On the upper left, non-performing assets are flat to prior quarter and prior year, with non-performing loans representing just 43% of loans. 43 basis points of loans. Commercial classified loans is a percent of commercial loans increased to 174 basis points from 139 basis points as classified loans increased by 118 million on an absolute basis. The balance was up as we saw migration of a few larger credits that we expect a cure over time.
Speaker 5: Yeah, so it is something we looked at, Mark, and you know that we did that in the first quarter of this year. We structured about 400 million at that time. What I would say is, you know, it's something we continually look at, and we bounce that obviously against our capital levels and our capital forecast.
Yes. So it is something we looked at Mark and you know that we did that in the first quarter of this year, we restructured about $400 million.
At that time, what I would say is.
It's something we continually look at.
We balance that obviously against our capital levels and our capital forecast.
Speaker 5: things that we see as far as that. So I'll leave it at there. It's something that we continue to look at.
And things that we see as far as that so.
<unk>.
I'll leave it at there is something that we continue to look at.
Speaker 2: There's obviously some opportunities there. It's competing against capital for other initiatives as well. So that's where we are.
And there is obviously some opportunity there is competing against capital for other initiatives as well. So that's where we are on that.
Glenn MacInnes: Net charge offs in the upper right total 29 million or 23 basis points of average loans on an annualized basis. Cases. We divested another 78 million in office loans in the quarter. These divestitures generated 13 million of the 29 million in net chargeoffs. Worth repeating, our total office exposure declined 110 million, inclusive of other actions this quarter.
Speaker 9: And then can you update us on how much you sold in this quarter and performing office loans and roughly where you sold those relative to par?
Okay, and then can you update us on how much you sold in this quarter and performing office loans, and roughly where you sold those relative to par.
Okay.
Speaker 2: So I think in my comments, it was the 78 million that we sold. And if you just do the math on the provision of 13 million, that equates to about 83 cents on the dollar.
So I think in my comments that was $78 million that we sold.
And if you just do the math on the provision of $13 million that equates to about <unk> 83 on the dollar.
Glenn MacInnes: On 517, we maintained strong capital levels. All capital levels remain in excess of regulatory and internal targets. Our Common Equity Tier 1 ratio is 11.2%, and our tangible Common Equity ratio was 7.2 percent. Our tangible book value was $29.48 a share. Including the AFS mark on our securities portfolio, our Common Equity Tier 1 ratio would be approximately 9.5% as of September 30.
Speaker 9: Okay, great. And then lastly, hopefully there aren't any more failed banks, but if there are, would Webster be a likely interested buyer and some FDIC transactions?
Okay, Great and then lastly, hopefully there aren't any more failed banks, but but if if there are would webster be likely interested buyer and some FDIC transactions.
Speaker 3: Yeah Mark, it's interesting, right? I just made the comment to Matt that whole bank acquisitions are not high priority for us.
Yes, Mark it's interesting right I just made the comment to Matt that whole bank acquisitions are not high priority for us I do think that it would behoove us to just make sure that if there is a clear strategic opportunity that makes a ton of sense economically.
Speaker 3: I do think that it would be who- us to just make sure that if there's a clear strategic opportunity that makes a ton of sense economically.
Glenn MacInnes: I'll wrap up my comments on slide 18 with our fourth quarter outlook. We expect loans to grow in the range of 1 to 2% with growth focused in strategic segments. We expect core deposits to be in the range of third quarter, with a year end loaned deposit ratio in the mid-80s. We expect net interest income of 580 million to 590 million on a non-FTE basis and excluding accretion. Approximately 4 million in accretion would be added to the interest income outlook.
Speaker 3: I guess I wouldn't exclude us, right? But I'm hoping there are no further failed banks as well, but I think hopefully if we keep executing where we are, then the dust settles, I think, will be in a good position and have the right financial characteristics and strength to be a buyer of a good strategic bank if something happens that way. So I wouldn't rule it out, but it's certainly not on our game plan. I'm hoping there are no further failed banks as well.
I guess I would I wouldn't exclude us right, but it's.
I am hoping there are no further failed banks as well, but I think hopefully if we keep executing where we are.
When the dust settles I think we'll be in a good position.
And have the right financial characteristics and strength to be a buyer of a good strategic bank.
Glenn MacInnes: For those modeling net interest income on an FTE basis, I would add roughly 17 million to the outlook. Our net interest income outlook assumes no further fed increases. We currently expect them to be flat to the third quarter. Non-interest income should be approximately 90 million. Core expenses are expected to be around 305 million with an efficiency ratio in a range of 42%. Our expense outlook excludes the FBIC special assessment. We expect an effective tax rate of 21%. We'll continue to be prudent managers of capital and target a Common Equity Tier 1 ratio of 10.5%.
If something happened.
That way, so I wouldn't rule it out, but it's certainly not on our game plan.
Thank you.
Thank you.
Speaker 1: Again, if you have a question, please press star one, telephone keypad. If you wish to remove yourself from you, simply press star one again.
Again, if you have a question. Please press star one telephone keypad, if you wish to remove yourself from new simply press star one again.
Speaker 1: Your next question comes from the line of Broad Preston of UBS. Your line is open. Hey, good morning, everyone. How are you?
Your next question comes from the line of Brody Preston of UBS. Your line is open.
Hey, good morning, everyone. How are you.
Good morning.
Speaker 10: I'm enjoying a little bit late. So if I repeat anything, just feel free to tell me to review the transcript. But I did think, John , I think I saw you gave the Sherry National Credit percentage at 12% do you happen to have?
Okay, sorry, I joined a little bit late so if I if I repeat anything just feel free to tell me to review the transcript but.
Jon Ciulla: With that, I'll turn it back to John for closing remarks. Thanks, Alokland. As I wrap up my remarks, I want to hit on the implications of the proposed regulatory changes for banks in excess of 100 billion in assets, as it's among the topics we're most frequently asked about. We anticipate it'll be several years before we reach the asset threshold at which the proposed regulations would impact Webster. During that time, both the application of the regulations and the operating environment may significantly change.
But I did think John I think I saw you gave the shared national credit percentage at.
At 12% do you happen to have which you guys are the lead underwriter on or the agent on yes.
Speaker 10: You guys are the lead underwriter, honor the agent on. Yeah, less than
Yes, less than 5% of that.
Speaker 4: Okay, so less than five of the 12. Correct. We'll do that. Okay, cool. And do you have an ad what the...
Okay, so less than five of the 12 correct.
Okay cool.
Do you happen to have what the.
Reserve on the office portfolio is at this point.
Speaker 3: We haven't disclosed that number, obviously it's moved up and it's at a higher level than the overall portfolio, but we don't disclose that.
We havent disclosed that number.
Jon Ciulla: As you enhanced risk framework requirements that may apply to us as we approach 100 billion, just as we have tackled the OCC's heightened standards requirements that came with crossing the $50 billion threshold. While there will likely be increased financial burdens, such as required debt issuance and compliance costs, there could be several paths to absorbing and overcoming these challenges, including our increased scale and earnings power. In the near term, we believe our size brings a unique mix of scale and agility relative to many of our regional bank peers. We'll utilize our strong operating position to grow in our key markets and business lines, allocating our resources to the highest return opportunities all within a disciplined risk management framework.
Obviously, it's moved up and it's at a higher level than the overall portfolio, but.
We don't disclose that rock.
Okay.
Speaker 10: Glenn, could you maybe speak around what the puts in the takes will be as it relates to an eye and the NIM going forward? Maybe help me better understand?
Glen could you maybe speak around what the puts and takes will be.
As it relates to <unk>.
NII and the NIM going forward, maybe help me better understand.
Speaker 2: you know the cadence of fixed asset repricing throughout you know the fourth quarter and then through 2024 and you know what the impact alone yields will be sure yeah let me give you a sense of uh and i'll just look at you know the two dynamics that we have there Brody are you know that fix rate loans repricing and that if you think about it it's about a billion three a quarter right um so if you think you just think about that over the next couple quarters it's about a billion three repriced
The cadence of fixed asset repricing throughout the fourth quarter, and then through 2024 and <unk>.
What the impact to loan yields will be to that.
Sure Yeah, let me give you a sense of and I will just look at the two dynamics that we have there <unk> are fixed rate loans repricing and that if you think about it it's about a $1 billion three a quarter right.
Jon Ciulla: With that, I want to wrap up my comments by saying thank you to all our colleagues for their strong efforts both in moving our strategy forward, completing the conversion, and getting us to where we are today.
Unknown Executive: Operator, with that, Glenn and I will open up the line to questions. Thank you. If you have a question, please press star one on your telephone keypad. If you wish to remove yourself from the Q Simply Press star one again, one moment for your first question.
So if you think if you just think about that over the next couple of quarters at about $1, three repricing and given our rate forecast you'd probably pick up about $275 250 basis points on that as it rolls forward rate over the next couple of quarters, and then depending on where the fed is in the back end of the year that might come in a little.
Speaker 2: And given our rate forecast, you'd probably pick up about 275, 250 basis points on that as it rolls forward.
Speaker 2: right over the next couple quarters and then depending on where the bed is in the back end of the year you know that might come in a little bit but that's that dynamic on the fix rate loans I think about it in terms of an in-memand probably supports are in by about four basis points going forward
Bit, but that's that dynamic on the on the on the fixed rate loans I think about it in terms of NIM and probably supports our NIM by about four basis points going forward and then likewise on the investment portfolio. You have about 300 million that is typically reinvested and for that we're probably picking up about 450.
Christopher McGratty: Your first question comes from the line is Chris McGratty of Keith Breet and Woods. Your line is open. Oh great, good morning.
Speaker 2: And then likewise on the investment portfolio, you have about 300 million that is typically reinvested. And for that, we're probably picking up about 450 basis points now. You know, that'll probably drop as race change.
Jon Ciulla: Hey, Jon, maybe a high level question. This ongoing de-risking that you've been doing. I guess where are you in terms of like how much more do you think you need to do? I mean, the law straights on the office. The implied law straights on the office from this quarter looks, you know, a bit higher than what you've been doing for the last several quarters. Just kind of big picture. Where are you in terms of de-risking the book?
Basis points, now that will probably drop as rates change to to like the low threes mid threes.
Speaker 2: to like the low freeze mid-threes. But there again, we're picking up about two basis points.
But there again, we're picking up about two basis points in NIM support going forward. So if I look at those two factors as well as the periodic book, which will continue to reprice on the loan side.
Speaker 2: uh... support going forward so if i look at those two factors as well as the periodic book which will continue to the reprise on the loan side
Jon Ciulla: Yeah, it's interesting. I don't think Chris, there's kind of a dedicated timeline. I think we're, as you heard me say, the billion to an office we have right now, you know, we sort of feel good about with respect on a relative basis to having, you know, getting credit enhancements, continuing to work on the portfolio. So, for us, it's looking at loans, looking at the strategic nature of them, whether they're with, you know, investors and clients that we know very well that we're going to continue doing business with, whether they're standalone transactional, what the kind of metrics and dynamics are.
Speaker 2: you know, and then, so you have that as going as, as, as a favorable tailwind. And then the wild part here is deposit pricing, right? And so we do think we did see a moderate and fourth quarter. We do think it's going to continue to moderate over the next couple quarters. And then the Fed will begin to cut. There'll be a natural like 90-day lag on that. But we think the support that we have on the repricing side, reinvestment side will sort of moderate.
And then then so you have that is going as a favorable tailwind and then the wildcard here is deposit pricing right and so we do think we did see a moderate in the fourth quarter. We do think it's going to continue to moderate over the next couple of quarters.
Then the fed will begin to cut and there'll be a natural like 90 day lag on that but we think the support that we have on the repricing side reinvestment side will sort of moderate to any pressures that we get onto the positive side at least for the first half of the year and then we should actually we should be well positioned if the fed does.
Speaker 2: any pressures that we get under the positive side, at least for the first half of the year, and then we should actually, you know, we should be in good, well positioned, if the Fed does proceed with cutting on the second half, back half.
Proceed with cutting on the second second half back half of the year.
Jon Ciulla: And then each quarter, you know, Jason and the team sit down and say, hey, we, even though this may not be a problem now, this is something that's not strategic for us. Or we have an opportunity at a reasonable economic cost to move down. So, we're not really looking at a serial reduction in the exposure. We're being opportunistic. And we're making, I think, the right economic decisions because many of these loans are going to refinance fine.
Speaker 4: God it, thank you for that. And then John , I know you talked earlier about, you know, kind of the...
Got it thank you for that and then.
John I know you talked earlier about.
The.
Speaker 10: the leverage loan in the sponsor, you know, especially the sponsor book.
The leverage loan in the sponsor, especially sponsor book.
Alright.
Speaker 10: I guess I wanted to better understand kind of like...
I guess I wanted to better understand kind of light.
Speaker 10: Some of the final points of the details, the underwriting there and kind of the things you do to structure those loans to really give you protection. And I'm not expecting to speak to this specific credit, but you know, you know, you all were on the right aid credit, files for bankruptcy, but like, you know, the ABL.
Some of the final points and the details the underwriting there and kind of the things you do to structure those loans to really give you protection.
Jon Ciulla: They're going to pay off fine. Some of which, you know, we think in the future may have some problems just given the paradigm shift. But I think you'll see us continue at this level, you know, looking at a $25 million, $75 million portfolio or book of business in the quarter. And if there's a good economic strategic way to exit those credits, we will. But, you know, we're not kind of urgently and in this serial fashion, trying to get rid of the exposure. Okay, that's helpful.
Expecting to speak to the specific credit.
You all were on the Rite aid credit files for bankruptcy, but like the ABL.
Speaker 10: Filo notes in the market are trading at 92, 93% of par. And so like market obviously expects very little loss. It looks like you got you guys in the other banks in a position to kind of get paid back first. And it feels really well collateralized. And so could you just kind of help us better understand the structure of those deals and what you kind of do to help protect yourself in the event that something goes.
Low notes in the market are trading at 90, 293% of par and so market, obviously expect very little loss. It looks like you've got you guys and the other banks are in a position to kind of get paid back first.
It feels really well collateralized. So could you just kind of help us better understand the structure of those deals and what you can do to help protect yourself in the event something goes wrong.
Glenn MacInnes: Maybe Glenn, you gave the loan deposit and expectations for the balance sheet. How should we be thinking about just the level of borrowings and, you know, security growth from here or decline?
Speaker 3: Yeah, I guess there's a couple of questions there because you threw in the AVLD all at the end, right? And so, you know, that's, I think that's a completely different animal. You're, you know, underwriting against liquidation value on a large retail company. That's kind of standard asset-based lending. I do think the market believes what everybody believes is someone will come in and provide dips in dancing and there'll be an orderly liquidation and everyone will get paid out. And we've seen that story play over and over again.
Yeah.
Yes, I guess Theres a couple of questions here, because you threw in the ABL deal at the end right and so that's I think that's a completely different animal youre underwriting against liquidation value on it on a large retail company that's kind of standard asset based lending I do think the market believes what everybody believes is someone will come in and.
Glenn MacInnes: So, I think I'll take securities first. So, you know, we're like 14, 14 and a half million. I think you would expect it over the course of the next couple of quarters to stay within that range, depending on long growth. The question on borrowings is, I think, you know, I think we're at a level right now where we'd probably expect to be pretty flat to the two, say, two plus billion mark.
Did dip financing and there'll be an orderly liquidation and everyone will get paid out and we've seen that story play over and over again in sponsor and specialty.
Speaker 3: In sponsor and specialty, you know, business, I just, it's about the strength of the people, the continuity we've been doing it for 20 years. We deal with sponsors we know.
Business I guess, it's about the strength of the people that continuity we've been doing it for 20 years, we deal with sponsors we know who support credits and have expertise in the industries and sectors. They are in you'd be amazed at the level of diligence and detail. We do in technology. If were doing a deal of software as a service deal we're doing.
Jon Ciulla: Okay, and maybe the last one, one of your peers turned the buyback back on this quarter. I'm interested in your updated thoughts on whether buybacks at this point of the cycle makes sense. Yeah, Chris, I think it's a great question. You know, we bought back $50 million in the quarter in Q3. We clearly have capital levels and capacity to generate capital to, you know, continue the program. I would tell you that, you know, we're looking at this from from a position of having good flexibility, but also recognizing that we want to make sure that we have capital.
Speaker 3: who support credits and have expertise in the industries and sectors therein. You'd be amazed at the level of diligence and detail we do in technology. If we're doing a deal as software as a service deal, you know, we're doing third party evaluations of the software. We're evaluating the contracts. The end users were we know the management team very well. We know the sponsors very well. We structure the deals.
Third party valuations for the software we are evaluating the contracts the end users, where we know the management team very well, we know the sponsors very well we structure the deals.
Speaker 3: You know that so there's some level of amortization. We don't chase as you know the last couple of terms of leverage where the non-vanks are chasing. We plan a different market. So it's just a combination of having the right people a really disciplined approach.
Yes.
So there is some level of amortization, we don't chase as you know over the last couple of turns of leverage where the non banks are chasing we play in a different market. So it's just a combination of having the right people a really disciplined approach staying in the swim lanes in the sectors that we know and understand and not moving off of.
Jon Ciulla: If we do a tuck-in acquisition, if we do grow loans significantly, if we see cracks in the market from a credit perspective. So, I guess the way I would characterize it is I wouldn't rule it out, but I think we're being a little bit more cautious as we look in the fourth quarter to our activities in that area.
Speaker 3: staying in the swim lanes and the sectors that we know and understand and not moving off of that discipline process. And it's why through the great financial crisis and through the pandemic and through this higher interest rate environment, we've been able to see resilience in that portion.
Of that disciplined process and it's why through the great financial crisis and through the pandemic and through this higher interest rate environment, we've been able to see resilience in that portfolio.
Unknown Executive: Thanks. Thanks, Sean. Thank you.
Speaker 10: Got it. And then the last one for me, I just wanted to ask her on the HSA book. I feel like this has been a topic that's come up sporadically, you know, over the last several years, but...
Got it and then the last one for me I just wanted to ask around the HSA book.
Casey Haire: Your next question comes from line of Casey Haire of Jeffries. Your line is open. Yeah, thanks.
I feel like this has been a topic that's come up sporadically over the last several years, but.
Glenn MacInnes: Good morning, everyone. Just phone up. I guess Glenn on the NIM. So NIM is going to be flat in the fourth quarter and borrowings, which obviously helped in the third quarter of the decline there. It sounds like they're going to be flat. So what is the offset to the beta creep that you expect to keep to keep NIM flat? Is it long growth? Just looking for a little color on what holds NIM stable in the fourth quarter.
Speaker 10: I wanted to ask just because other banks are looking to potentially monetize unique assets that they have. And so when I look at what's happened in HSA, it feels like some of your non-bank competitors have been able to really kind of pay really high multiples to acquire other HSA portfolios that otherwise...
Well I wanted to ask just because other banks are.
Looking to potentially monetize unique assets that they have and so when I look at kind of what's happened in HSA it feels like.
Some of your non bank competitors have been able to really kind of pay really high multiples.
To acquire other HSA portfolios, but otherwise.
Speaker 10: I think if they had the same investor base that you do, they wouldn't be able to pay as much. And so, you know, with the growth in that business-finding kind of-
I think if.
If they had the same investor base that you do they wouldn't be able to pay as much and so.
Glenn MacInnes: Yes. Sure. So some of it is some of it is long growth. Some of it's the rate on loans where we get the full benefit of the periodic loans repricing. And, and then you do have we do we don't pick up one day, at least on an in basis from an earning standpoint. And then it's pretty much some of that's neutralized by, you know, what we think deposit growth will be or deposit cost will be going into the fourth quarter.
With the growth in that business line kind of.
Speaker 10: slowing to some extent and the value of it really not showing up in the multiple and
Slowing to some extent.
The value of it really not showing up in the multiple in.
It being tough to kind of <unk>.
Speaker 10: and organic, we grow that business, just given that you're treated like a bank, or as others that are treated like non-banks. How do you think about maybe monetizing that and doing something more strategic there to help your investors realize the full value of that business?
Inorganically grow that business, just given that you treated like a bank versus others that are treated like non banks.
Glenn MacInnes: Like I said in my comments, we still think that there's there'll be the project pressure going into into the fourth quarter. I'll be it very more moderate than has been certainly in the last couple quarters. Okay.
How do you think about maybe monetizing that.
Doing.
Doing something more strategic there to help you our investors realize the full value of that business.
Unknown Executive: Great.
Speaker 3: That's a great question. And I think all of your observations in general are correct and we've talked about it over time. The basic premise for us is that we have a very efficient way to deploy long duration low cost deposits as a bank that really helped profitability for us. And while the market has slowed, if you look at it, you're still growing deposits at very low cost.
That's a great question and I think all of your observations in general are correct and we've talked about it over time. The basic premise for US is that we have a very efficient way to deploy long duration low cost deposits as a bank that really helped profitability for us and while the market has slowed.
Glenn MacInnes: And then just question on the funding strategy. I mean, your deposit growth was was pretty broad based. You know, interlink still is doing a lot of the heavy lifting. You know, on that slide was it slide five. It's not it's 9% of your deposit franchise. You know, what long term is there is that a seal? Is there a ceiling that you have for interlinkers that is. You know, is 9% of right level just trying to figure out how big that can become.
If you look at it youre still growing deposits at very low costs in the mid to high single digits and there arent. Many channels that are that are doing that so and we are continuing to grow along with the market on an organic basis. So I take your point in terms of the inorganic growth of some of the other other top five players.
Speaker 3: in the mid to high single digits and there aren't many channels that are doing that. So and we are continuing to grow along with the market on an organic basis. So I take your point in terms of the inorganic growth of some of the other other top five players.
Glenn MacInnes: So, you know, we're in a process of doing our outlook over the next couple of quarters in actually years. And so, you know, I think if we're at 9% now, depending on, you know, our sources of funds and other sources of funds, we, you know, that could go plus or minus. I, you know, it could go as high as 15% but, you know, that's something that we're still in the process of planning right now. Got it.
Speaker 3: It is very valuable to us. It helps us generate the kind of returns and profitability. We have albeit it's a smaller part of the whole after the MOE. We are frustrated that the market doesn't recognize the value that we're still building in that business.
So.
It is very valuable to us it helps us.
Generate the kind of returns and profitability, we have albeit it's a smaller part of the hole after the Moe.
We are frustrated that the market doesn't recognize the value that we're still building in that business.
Jon Ciulla: Okay. And just last one for me on the efficiency, you know, I know it's early for 24, but you guys, obviously, at 42% are in, you know, more efficient than most of my coverage universe. John, you mentioned, you know, you are, there are going to be some financial burdens about, you know, and getting the bank ready to be 100 billion. What, you know, what. Can you pass that along, or is that, is that something that, you know, you might let the efficiency ratio drip up.
Speaker 3: as part of the bank. And as you know, we continue, we talk about it all the time to evaluate...
As part of the bank and as you know we continue when we talk about it all the time to evaluate.
Speaker 3: HSA in the bank and the value it has in the bank outside of the bank because we have an obligation to make sure that we're making the best decision.
Say in the bank and the value. It has in the bank outside of the bank because we have an obligation to make sure that we're making the best decisions.
Speaker 3: for our shareholders as we move forward. And so up until now, it's continued, particularly in this interest rate environment, it's pretty easy for us to say, operating HSA as the division of our bank creates.
For our shareholders as we move forward and so up until now it's continued particularly in this interest rate environment, It's pretty easy for us to say operating HSA as a division of our bank creates the most value for our shareholders in the long term in terms of the quality and the value of the cash flows we don't think the market.
Jon Ciulla: Yeah, that's a good question. And again, as Glenn said, we're working through our plan now and we're not going to sort of, we're not ready to provide guidance for 24, but I will tell you, our sense is, look, we still have some opportunity coming out of the conversion as we consolidate sub ledgers and look at back office processes. And consolidate call centers, which we still haven't completed. So, okay, so we do still have some merger related cost opportunities, cost of opportunities, and I kind of like where we are.
Speaker 3: the most value for our shareholders in the long term, in terms of the quality and the value of the cash flows. We don't think the market, where we're trading at a seven times multiple and future earnings, is reflecting that you...
Where we're trading at a seven times multiple on future earnings is reflecting that unique company and business.
Speaker 3: company and business. And we want to continue to keep informing people and educating people about where we are. We were able to execute on the Ben Transaction last year, which gave us higher levels of user experience and a better mouse trap, if you will, and I think it's helped us compete in the marketplace.
We want to continue to keep informing people and educating people about where we are we were able to execute on the <unk> transaction last year, which gave us higher levels of user experience and a better a better mouse trap. If you will and I think it's helped us compete in the marketplace.
Jon Ciulla: Our feeling is we also have opportunities to invest and grow, particularly if the market green lights with respect to loan growth and people feel comfortable about a soft landing. I think we can identify, you know, additional teams and commercial banking to bring on. We're definitely investing in products and capital markets and effects and card and other commercial treasury products that will enhance our balance of non interest income. So, our kind of view is we think we can operate steadily in the low 40s efficiency ratio and to the extent we can gain more cost savings that will, it'll provide us an opportunity to invest in key products and services and people.
Speaker 3: We are still looking every time there's a deal in the market of another portfolio because the market keeps consolidating. I think the top 10 now represent 83% of the market.
Still looking every time there is a deal in the market of another portfolio because that market keeps consolidating I think the top 10 now represent 83% of the market.
Speaker 3: you know, we'll try and be in a participant in that. But I think it's gonna be a continue evaluation for us and we'll make the right decision on where HSA belongs, given the value we can create owning it, or the value that it would receive as a different company or a company that was part of a joint venture or somewhere else outside the bank. Thank you.
We'll try and be a participant in that but I think it's going to be a continue evaluation for us and we will make the right decision on where HSA belongs given the value we can create owning it.
Or the value that it would receive.
<unk>.
A different company or a company that was part of a joint venture or somewhere else outside the bank.
Great. Thank you for taking my questions that are on I appreciate it.
Jon Ciulla: So, you know, if we can continue to post the numbers that we promised when we did the merger, the 20% ROATC, the one and a half ROA and, you know, an efficiency ratio in the low 40s, I think size scale and momentum will allow us to keep that efficiency ratio in the low 40s without starving the bank with respect to future investment. And then if you fast forward right three years, you look at the size of our balance sheets, we approach $100 billion. I think we'll have some optionality and we'll be in a better place than others who are similarly situated given how kind of efficient our operating months.
Speaker 1: Your next question comes from Lane of Daniel Tameo of Raymond James. Your line is open. Morning, everyone. Thanks for taking my question.
Your next question comes from the line of Daniel Tamayo of Raymond James Your line is open.
Good morning, everyone. Thanks for taking my questions.
Maybe.
Just starting in.
Speaker 11: The decline in the commercial industrial, commercial loan areas, and you talked about the emphasizing some massive classes there.
The decline in the commercial industrial.
Loan areas and I know you talked about deemphasizing, some some asset classes there.
Unknown Executive: Thank you.
Speaker 11: give a little more detail on where you were pulling back and I apologize I jumped on the little late if you already covered this.
Give a little more detail on where you were pulling back and I apologize I jumped on a little late if you already covered that.
Speaker 3: No, it's quite alright, it's a good question and we haven't covered it in detail. So the decline across the board on the CNI side was generally driven by, we had mortgage warehouse obviously down and I think you'll likely can see that continuing to reduce from a strategic perspective.
No it's quite all right. It's a good question and we haven't covered in detail. So the decline across the board on the C&I side was generally driven by where we had mortgage warehouse, obviously down and I think youll likely see that continuing to reduce from a strategic perspective, we.
Matthew Breese: Your next question comes from me. I'm Matthew Breese of Steven Zink. Your line is open.
Jon Ciulla: Hey, good morning. I know office BRE grabs a lot of the attention these days, but I was curious thoughts and updated color on the sponsor specialty and leverage loan book. How have those portfolios been been performing in a higher rate environment? Yeah, Matt, so far, so good. We've talked about it before those companies that we under right there tend to have predictable, predictable cash flow streams, recurring cash flow streams, contractual cash flow streams.
Speaker 3: We were very careful on transaction only ABL and equipment finance in the quarter since the crisis in March. And so those did grow rapidly and may have had a small decline.
We're very careful on transaction only ABL and equipment finance in the quarter since the crisis in March.
So those did grow rapidly and may have had a small declines our fund banking activity, which are high quality fund.
Speaker 3: Our fund banking activity, which high quality, fund banking loans, equity subscription lines to private equity firms was down about half a billion dollars, and that was driven by one big payoff, and then just lower utilization. Our overall middle market, CNL.
Jon Ciulla: And so we haven't seen a deterioration, significant deterioration in the credit profile. I'd say it's behaving like the rest of the book, probably some level of moderate negative risk rating migration. But it hasn't spooked us at all. And again, you know, I it's always hard to predict the future, but one of the wonderful things about that portfolio besides the type of companies that we lend to, you know, are the private equity firms that we've been doing business with for, you know, 10 and 20 years that are kind of flush with cash raising new funds and really not reticent to, you know, capitulate and give up these really good companies.
<unk> banking loans equity subscription lines to private equity firms was down about half a billion dollars and that was driven by one big pay off and then just lower utilization our overall middle market C&I utilization on lines after kind of holding steady for several quarters at 50% with.
Speaker 3: Utilization on lines after kind of holding steady for several quarters at 50% with down.
Down into the mid <unk>. So we did see seasonally lower usage and I don't know what that portends in terms of client confidence or anything but utilization was lower as well so that kind of drove.
Speaker 3: into the mid 40s so we did see seasonally lower usage and I don't know what that portends.
Speaker 3: in terms of client confidence or anything, but utilization was lower as well. So that kind of drove...
Speaker 3: The quarter results, some of it was us pulling back on levers, some of it was a seasonally slow third quarter, more sluggish loan growth, and that's where we ended up. I think as you go forward, we've talked about really making sure that we have...
The quarter results some of it was us pulling back on levers some of it was a seasonally slow third quarter more sluggish loan growth and that's where we ended up.
Think as you go forward, we've talked about really making sure that we have the liquidity capacity the loan to deposit ratio and the capital to grow those full relationships across our middle market businesses are.
Jon Ciulla: No question about the fact that these are floating, generally floating rate loans. So their debt service has increased. They generally are lower in contractual amortization. So really it's the interest expense. And so far, you know, the capacity to continue to service that debt has seemed strong. And obviously we feel comfort in the fact that we've got strong private equity firms behind those companies in case things start to go sideways. Generally, we work things through with them and the deals continue to perform.
Speaker 3: The liquidity capacity to loan to deposit ratio in the capital to grow those full relationships across our middle market businesses, our other ancillary CNI businesses, sponsor and specialty, non-office commercial real estate. We are seeing some level of increased demand as we move into the fourth quarter, our pipeline's up about half a billion dollars.
Other ancillary C&I businesses sponsor and specialty non office commercial real estate, we are seeing some level of increased demand as we move into the fourth quarter. Our pipeline is up about half a billion dollars.
Speaker 3: So I think we'll continue to see mortgage warehouse run down. There may be a couple of other small sub-scale businesses where we won't be generating the kind of loan growth that we've generated in the past, but we think we can offset that with, our core franchise building lo and j.
I think you think will make we will continue to see mortgage warehouse rundown.
There may be a couple of other small subscale businesses, where we won't be generating the kind of loan growth.
Jon Ciulla: So so far, I'd say it's, you know, coming out according to oil, which is they're able to service the increased interest rate cost. And we seem to have, you know, pretty stable performance in that in that book.
That we've generated in the past, but we think we can offset that with our core franchise building loan generation.
Speaker 11: And then on the flip side, the commercial classified loans were up both on our absolute basis. And as a percentage of that portfolio, maybe you could talk a little bit about what drove that increase.
Jon Ciulla: And I just want to a reminder, what is the size of the, you know, what meets definition of leverage loans and then anything beyond that that would you consider, you know, a syndicated, a syndicated loan portfolio. Yeah, this is it's tricky because there's overlap everywhere, right? And we we reported on our regulatory statutory leverage loans that those have actually remained relatively flat over the last couple quarters. It's about 6% of our total loan book or $3 billion and most of that as you intimated is in our sponsor and specialty book.
Terrific.
And then on the flip side the commercial classified loans were up both on an absolute basis and as a percentage of that portfolio. Maybe you could talk a little bit about what drove that increase.
Sure happy to.
Speaker 3: Sure, happy to. First of all, I didn't say up in my front comments, but I did reference that that was...
First of all.
I didn't say up in my comments, but I did reference that that level of classifieds at 174% of a smaller portfolio in the quarter is actually 100 basis points lower than Webster's classified percentage in the fourth quarter of 2019 before the <unk>.
Speaker 3: Classifies at 1.74% of a smaller portfolio in the quarter is actually a hundred basis points lower than Websters classified percentage in the fourth quarter of 2019 before the pandemic so just a reminder again that we've been the entire industry has been benefiting from really really favorable credit metrics and this is just a small step I think towards a more normalized rate going forward But in terms of the actual contributions there
Jon Ciulla: Our shared national credits are about 12% and there's some subset of that, which is leverage, but about 12% of total loans. That number is actually down from, you know, pre-merger Webster numbers as a percentage of total loans just given kind of the mix that came together between Webster and Sterling. Again, you know, no kind of differentiated performance there. So I've told the story a million times to the street over the last 15 years about shared national credits.
So just a reminder, again we have been the entire industry has been benefiting from really really favorable credit metrics and this is just a small step I think towards a more normalized rate going forward, but in terms of the actual contributions there.
Speaker 3: There weren't any kind of correlations across geography, asset class, business line. We saw some C&I in healthcare. We had a small portion in ABL. We had some office migration that we talked about prior and then just generally across.
Werent any kind of correlations across geography asset class business line, we saw some C&I in healthcare, we had a small portion of the ABL. We had some office migration that we talked about prior and then just generally across.
Speaker 3: other C&I categories. So it really wasn't, we didn't see correlated risk. We just saw credit-specific migration as part of our overall modest negative risk-grating migration in the portfolio.
Jon Ciulla: We don't have a buy side desk. We're not a stuffy for the big banks or the non banks who are syndicating out loans. Our use of shared national credits over the last 15 years has been in strategy or in geography or in product, meaning that it's a middle market or corporate company within our middle market footprint where we have cross sell opportunities direct access to management. But they have a $700 million credit facility and certainly we don't have the balance sheet to provide that.
There are other C&I category. So it really wasn't we didn't see correlated risk. We just saw credit specific migration as part of our overall modest negative risk rating migration in the portfolio.
Speaker 11: Lastly, just one for Glenn on the hedging strategy and how you expect that an interesting come would react to rate cuts if they do materialize next year.
Okay terrific.
And lastly, just one for Glenn on the hedging strategy.
And how you expect the net interest income would react to rate cuts if they do materialize next year.
Speaker 2: Yeah, so Daniel, the morning, we did talk a little about that as we look, we're not providing an outlook for 2024 at this point.
Yes, so Daniel good morning, we did talk a little about that as we look we're not providing an outlook for 2024 at this point.
Jon Ciulla: So we'll participate in that credit and cross sell. It's in our sponsor and specialty group where we have expertise and technology and other industry verticals where we'll strategically participate with access to management. Again, we underwrite and portfolio manage all of our shared national credits exactly the same way we do a bilateral credit. And our shared national credit book has a weighted average risk rating of about a full half a turn 50 basis points better than the overall weighted average risk rating of our commercial portfolio because those bigger companies tend to be more resilient and have more revenue stream.
Speaker 2: The point I made earlier is that I think our NIM will continue to be supported into the fourth quarter and into the next couple quarters.
The point the point I made earlier is that I think our NIM will continue to be supported into the fourth quarter and into the next couple of quarters through the benefit of both fixed rate loans repricing investment securities repricing as well as to periodically loans re pricing some of that will be.
Speaker 2: Through the benefit of both fixed rate loans repricing, investment securities repricing, as well as the periodic loans repricing, some of that will be obviously offset by deposit cost and are thinking on where the cumulative deposit beta will end up. But I think generally that's how we're feeling going into the next...
We'll be obviously offset by deposit cost.
And our thinking on where the cumulative deposit beta will end up but I think generally that's.
How were feeling going into the next couple of quarters.
Jon Ciulla: So those are the data points and I figured I'd share with you our view on how we go about underwriting and participating in shared national, credits. So understanding it's likely a blend of, you know, the leverage on portfolio, probably some real estate in there is it's fair to assume the underwriting characteristics like sponsor and specialty from a leverage perspective are similar to that book and from a commercial real estate perspective or someone to be able to be used in debt service coverage ratios.
Speaker 11: Thanks for all the color guys, appreciate it. Thank you.
Okay.
Thanks for all the color guys I appreciate it sure. Thank you.
Speaker 1: Your next question comes in the line of Steve, Alex Apollos of JP Morgan. The line is open.
Your next question comes from the line of Steve Alexopoulos of Jpmorgan. Your line is open.
Speaker 1: Hey, good morning everyone, Alex Lowe on Steve. Hey Alex.
Hey, good morning, everyone, Alex Lau on Steve.
Hey, Alex.
Speaker 1: Hey, I want to touch on deposits. So non-interspanning deposits were up on a period and basis in the quarter. What drove that uptick was a seasonal inflows? And is it fair to say that the customers chasing higher yield products in these demand balances are largely done?
Hey.
I wanted to touch on deposits so.
Noninterest bearing deposits were up on a period end basis in the quarter, what drove that uptick was it seasonal inflows.
Jon Ciulla: We find it. Yeah, I think that's a fair statement, but I'll also tell you we have very little shared national credit exposure and commercial real estate, you know, and I mean very little. Most of our shared national credit exposure is in sponsor and specialty in our middle market geography groups on mid corporate and large corporate relationships we have and then we have some in asset-based lending. Those are the ones I worry about the least.
And is it fair to say that.
These customers chasing higher yield products in these demand balances are largely done.
Speaker 2: Yeah, so let me take that and, John , but I think there is a portion of the increase in non-intersparing deposits that was related to the government inflow, which is season-allowing.
Yeah, So let me take that and John but I think there is a portion of the increase.
And noninterest bearing deposits that was related to the government and flow which is seasonality but.
Speaker 2: I think the bigger point is we've gone back and looked at DDA because as we look at our forecast and I've gone back to all the way back to 2019 when if I could add the combination of Webster and Starlink we had about 40 billion in combined deposits and at that point the DDA represented about 21.
The bigger point is we've gone back and looked at DDA.
Jon Ciulla: Those are to, you know, larger retailers, strong agents, cash to minion, you know, we generally don't have any problems with those transactions. So we don't have very much shared national credit exposure and commercial real estate. It's just not been one of our tools.
As we look at our forecast and Aegon back too.
All the way back to 2019, when if I can add the combination of western Sterling, we had about $40 billion in combined deposits and at that point. The DDA represented about 21% if I look at the third quarter ended the same sort of analysis and I stripped out the impact of interlink, that's relatively new.
Jon Ciulla: Understood. Okay. Last one for me, John, you had mentioned, you know, keeping capital handy for perhaps tuck-in acquisitions. I know historically it's been discussions around, you know, perhaps HSA tuck-in acquisitions, but I was curious if that comment meant anything broader is in whole banks or other sorts of fee and conbecals. Yeah, I know a great question and I think quite clearly means sort of complimentary acquisitions around fee generating or deposit gathering businesses where we have a path to some organic growth but would like to enhance and speed up that path to get a better balance of non-interest income and interest income rather than a whole bank acquisition.
Speaker 2: If I looked at the third quarter and did the same sort of analysis and I stripped out the impact of interlink, it's relatively new. We'd be in that 21...
Being at 21% range so.
Speaker 2: Pre-pandemic and if I look to where we are, it's typically run about 21.
Pre pandemic and if I look to where we are it's typically run about 21%.
Speaker 2: I think there will be some continued normalization in the average balances as customers move. And we've looked at this on a customer by customer basis. So there is some migration into higher yielding type of products.
There will be some continued normalization in the average balances as customers move and we've looked at this on a customer by customer basis. So there is some migration into higher.
Yielding type of products, but.
Speaker 2: But I think some of that so say you know, I think we'll get normalization over the next couple quarters But I think some of that will be offset by growth opportunities through whether it's new relationship Acquisitions or Treasury management type services. So I think if you think about that 11 or we have There'll be puts and takes on that but you know over the course of time and we're not given guys for 24 You know that that should be somewhere
But I think some of that says Hey, I think we'll get normalization over the next couple of quarters, but I think some of that will be offset by growth opportunities through whether it's new relationship acquisitions, our treasury management type services. So I think if you think about that 11, four we have there'll be puts and takes on that boat.
Jon Ciulla: We don't feel that right now, you know, you never say never and I've learned my lesson there, but, you know, given where we are, the great integration and conversion we just did, given the look at the dynamics in the marketplace, I would say highly unlikely whole bank activity on the inorganic side and it would be something that would be targeted on further low cost deposit gathering or fee generating businesses that are complimentary to our existing activities.
Over the course of time, and we're not giving guidance for 'twenty four.
That should be somewhere in the range.
Speaker 3: I agree with that plan. And yeah, I think your last statement was right that we're going to continue to see a creep up of the deposit cost there in the court, but that the rate of increase is slowing down because the customer behavior, people that were more in tune and it was more important to them to chase rate have done.
I agree with that Brian and Alex I think your last April was right that we're going to continue to see a creep up of the deposit cost there in the core but that the rate of increase is slowing down because of customer behavior people that were more in tune and it was more important to them to chase rates have done so.
Unknown Executive: Great. I'll leave it there. Thank you for taking all my questions.
Speaker 1: Thank you. And speaking of growth opportunities, now that the conversion with sterling is sterling is done, do you see any material cross selling opportunities in terms of growing these demand deposits? Now that you're integrated with sterling.
Thank you and speaking of growth opportunities now that the conversion with Sterling Sterling is done do you see any material cross selling opportunities in terms of growing these demand deposits now that youre integrated with Sterling.
Unknown Executive: Thank you.
Mark Fitzgibbon: Your next question comes from the line of Mark Fitzgibbon of Piper Sandler. Your line is open. Hey guys, good morning.
Glenn MacInnes: Glenn Martin. I wonder if you could share your thoughts on restructuring or selling available for sale securities in the fourth quarter given that, you know, rates may be stuck up here for a while. Yeah, so it is something we looked at, Mark, and you know, that we did that in the first quarter of this year. We structured about 400 million at that time. What I would say is, you know, it's something we continually look at and we balance that, obviously, against our capital levels and our capital forecasts and things that we see as far as that. So I'll leave it at there and it's something that we continue to look at and there's obviously some opportunities there competing against capital for other initiatives as well. So that's where we are on that.
Speaker 3: Yeah, I mean, I think I kind of hinted to that, Alex, that one of the things that's getting on our single core platform now and also being able to kind of pivot our resources to development and build out. We've got a robust plan on the treasury side in commercial and that's broadly defined with cash management products.
Yes, I mean, I think I kind of hinted to that Alex that one of the things that getting on our single core platform now and also being able to kind of pivot our resources to development and build out we've got a.
Robust plan on Treasury.
Side in commercial and that's broadly defined.
Cash management products.
Speaker 3: FX capital markets other products corporate card Where we believe that having deeper penetration and having a broader product set for our really loyal Commercial commercial customers will have the added benefit of growing core operating deposits So I do think that that's something that we believe we can execute on and we believe Will be successful as we move forward post converting
FX capital markets other products corporate card.
We believe that having deeper penetration and having a broader product set for our really loyal commercial commercial customers will have the added benefit of growing core operating deposits. So I do think that thats something that we believe we can execute on and we believe.
Glenn MacInnes: Okay. And then can you update us on how much you sold in this quarter and performing office loans and roughly where you sold those relative to part? So I think in my comments it was the 78th million that we sold. And if you just threw the math on the provision of 13 million that equates to about 83 cents on the dollar.
We will be successful as we move forward post conversion.
Jon Ciulla: Okay, great.
Speaker 1: Thank you for that. And then I just want to have a follow up on the HSA business. So these balances, you know, for the past three quarters have been in the $8.2 billion range. Can you talk about what it would take, you know, in the macro environment for a stronger HSA adoption and for these balances to start increasing? John , I think you said mid to high single digit. How do we get to the higher end of the range? Would a weaker job market actually benefit this range? Thank you.
Thank you for that and then I just had a follow up on the HSA business. So these balances for the past three quarters have been in the $2.
$2 billion range can you talk about what it would take.
Jon Ciulla: And then lastly, hopefully there aren't any more failed banks, but if, if there are, would Webster be a likely interested buyer and some FDIC transactions? Yeah, Mark, it's interesting, right? I guess I just made the comment to Matt that that whole bank acquisitions are not high priority for us. I do think that it would be for us to just make sure that if there's a clear strategic opportunity that makes a ton of sense economically, I guess I wouldn't exclude us, right?
The macro environment for stronger HSA adoption for these balances to start increasing.
John I think you said mid to high single digit how do we get to the higher end of the range.
Weaker job market actually benefit this range. Thanks.
Speaker 3: Yes, it's interesting. We used to answer these questions all the time, but I think generally higher healthcare costs push companies to higher adoption of full replacement high deductible health plans.
Yeah. It's interesting we used to answer these questions all the time, but I.
I think generally higher health care costs.
Pushed companies to higher adoption of full replacement high deductible health plans.
Speaker 3: Definitely if it was in a recessionary environment, if labor market is not quite as tight, companies are more willing to move to higher replacement costs.
Jon Ciulla: But I'm hoping there are no further failed banks as well. But I think, you know, hopefully if we keep executing where we are, you know, and the dust settles, I think we'll be in a good position and have the right financial characteristics and strength to be a buyer of a good strategic bank. If if something happened that way, so I wouldn't rule it out, but it's certainly not on our game plan.
Definitely.
In a recessionary environment, if labor market is not quite as tight.
Companies are more willing to move to higher replacement costs I will tell you we believe that part of full.
Speaker 3: I will tell you we believe that part of, in full transparency, right, part of the reason the market slowed a bit is that there's been significant penetration and adoption now. So there aren't as many green fields in terms of new opportunities. But in this economic environment, and in this job market environment, we have obviously seen slower growth.
Full transparency right part of the reason the market has slowed a bit is that there has been significant penetration and adoption now so there arent as many greenfields in terms of new opportunities, but in this economic environment and in this job market environment, We've obviously seen slower growth in.
Unknown Executive: Thank you. Again, if you have a question, please press star one keypad. If you wish to remove yourself from you, simply press star one again.
Im not rooting for.
A worse job market or a big recession, so that we get a slight increase in our HSA growth, but I think those are some of the dynamics there are higher healthcare costs coming in so I do know that that people are continuing to look at it and Chad does see opportunity and where obviously you have got a lot of rfps out there, but the <unk>.
Broderick Preston: Your next question comes from the line of Broad Preston of UBS. Your line is open. Okay, so less than 5 of the 12. Correct. Okay, cool. And do you happen to have what the reserve on the office portfolio is at this point? We haven't disclosed that number, you know, obviously it's moved up and it's at a higher level than the overall portfolio, but we don't disclose that. Okay.
Speaker 12: The market, you know, from the 20% growth days down to the 10% growth days, there's a lot of dynamics there and it's not just economic. It's also just a maturing of the industry. Thank you. Now that we're close to end of conference, we please ask that you try to restrict yourself to one question. So we can get everyone in the next question, custom line of Bernie Von Gizeki of Deutsche Bank. Your line is open. Yeah, hi, good morning. The question is, hey.
From the 20% growth days down to the 10% growth days, there's a lot of dynamics there and it's not just economic it's also just the maturing of the industry.
Speaker 13: Thank you. Now that we're close to end of conference, we please ask that you try to restrict yourself to one question.
Thank you.
Rather we are close to end of conference from please ask that you try to restrict yourself to one question.
Speaker 13: So we can get everyone in. The next question comes from Line of Bernie Von Gizeki of Deutsche Bank. Your line is open. Yeah, hi, good morning.
So we can get everyone in the.
Our next question comes from the line of Bernie <unk> of Deutsche Bank. Your line is open.
Yes, hi, good morning.
Good morning Shannon.
Speaker 12: Hey, my question is on fee specifically. So you talked about the pressure on fees from less capital markets activity.
Hey, my.
My question is on fees, specifically, so you talked about the pressure on fees and less capital markets activity. Although you have seen signs of an improving outlook into next year. What are you hearing from clients what signs do you see that helps drive that improving outlook and maybe just.
Speaker 12: But you have seen signs of an improving outlook in 10 next year. What are you hearing from clients? What signs do you see that helps drive that improving outlook? And maybe by just combining this on the Sterling integration, you basically highlighted some areas in Treasury catch management. But in the fee side, could you provide any size timing of these opportunities? So cap market pickup next year and Sterling integration opportunities sizing.
Glenn MacInnes: You know, Glenn, could you maybe speak around what the puts in the takes will be as it relates to, you know, and I and the name going forward, you know, maybe help me better understand. You know, the cadence of fixed asset repricing throughout, you know, the fourth quarter and then through 2024. And, you know, what the impacts the loan yields will be. Sure. Yeah, let me give you a sense of, and I'll just look at, you know, the two dynamics that we have there, Brody are, you know, fixed rate loans repricing.
Combined this on the Sterling integration you basically highlighted some areas in treasury cash management, but in the fee side could you provide any size timing of these opportunities though.
<unk> markets pick up next year and.
Sterling integration opportunities sizing.
Speaker 3: Yeah, it's a great question. I think I'll stick with Glen's comment that we're working through our plan right now for 24. And we haven't sized some of those opportunities in the timing of the rollout. As it relates to BAU and organic where we are, we didn't see in the quarter a relatively healthy level of non-interesting come.
Yes, it's great question, I think I'll stick with Glenn's comment that we're working through our plan right now for 24, and we haven't sized some of those opportunities and the timing of the rollout as it relates to <unk> and organic where we are we did see in the quarter relatively healthy level of noninterest income and underneath that where some goods.
Glenn MacInnes: And that if you think about it, it's about a billion three a quarter, right? So if you think you just think about that over the next couple of quarters, it's about a billion three repricing. And, you know, given our rate forecast, you know, you'd probably pick up about 275, 250 basis points on that as it rolls forward, right over the next couple quarters. And then depending on where the Fed is in the back end of the year, you know, that might come in a little bit, but that's that dynamic on the fixed rate loans.
Signs a little bit more of a direct investment equity tagged and income which shows some more activity on the on the sponsor side and that people may be.
Getting more active as they normally do at year end and so we're that's a good sign for us as we move forward, obviously, the swap market given where interest rates are has been kind of down but we may see some more activity just given the fact that the fed may pivot. So there are some decent signs.
Speaker 13: That's a good sign for us as we move forward. Obviously, the SWAT market, given where interest rates are, has been kind of down, but we may see some more activity just given the fact that the Fed may pivot. So there's some decent signs. And then we'll be able to, as we give guidance in Q4, we run out our roadmap on plan, be able to maybe size some of the incremental benefit of post conversion investment. Thank you. Your next question comes from the line of TMR, Brazil, of Wells Fargo. Your line is open.
Glenn MacInnes: I think about it in terms of them and probably supports are named by about four basis points going forward. And then likewise on the investment portfolio, you have about 300 million that that is typically reinvested. And for that, we're probably picking up about 450 basis points now, you know, that'll probably drop his race chain. James to, to like the low freeze, mid threes. But there again, you know, we're picking up about two basis points in them support going forward.
And then we'll be able to as we give guidance in Q4, we run out our roadmap on plan being able to maybe size some of the incremental benefit of post conversion investment.
Speaker 3: run out our roadmap on plan, be able to maybe size some of the incremental benefit of post conversion investments.
Speaker 13: Thank you. Your next question comes from the line of Kimmer, Brazil of Wells Fargo. Your line is open.
Thank you. Your next question comes from the line of tumor Brazilian <unk> of Wells Fargo. Your line is open.
Glenn MacInnes: So if I look at those two factors as well as the periodic book, which will continue to reprice on the loan side, you know, and then see, have that as going as, as a favorable tailwind. And then the wild part here is the positive pricing, right? And so we do think we did see it moderate in the fourth quarter. We do think it's going to continue to moderate over the next couple quarters.
Hey, good morning.
I'm just wondering.
Speaker 14: I'm wondering what the remaining credit mark is on the Sterling book. And then if you look at the link order increase in allowance, how much of that is commiserate with the link order increase in classified loans? And I'm just wondering kind of your expectation for allowance trajectory here, give them a map of that dress.
I'm wondering what the remaining credit Mark is on the Sterling book and then if you look at the linked quarter increase in allowance how much of that is commensurate with the linked quarter increase in <unk>.
Classified.
And I'm, just wondering kind of your expectation for allowance trajectory here given the macro backdrop.
Glenn MacInnes: And then the Fed will begin to cut. There'll be a natural like 90 day lag on that. But we think the support that we have on the repricing side, reinvestment side will sort of moderate the any pressures that we get on the positive side, at least for the first half of the year. And then we should actually, you know, we should be in good well positioned if the Fed does proceed with cutting on the second second half back half of the year.
Glenn MacInnes: Got it. Thank you for that.
Speaker 3: Yeah, good question. You know, I always kind of like and just like answering these Cecil questions because it's obviously a huge amount of work that goes into the modeling. Obviously a classified loan has a higher reserve on it. So, you know, the dynamics in the quarter for Cecil would be higher level of classified, overall lower loan balances.
Yes, good question.
Yeah.
Kind of like and dislike answering these questions because there is obviously a huge amount of work that goes into the modeling obviously a classified loan has a higher reserve on it so the dynamics in the quarter for seasonal would be.
Higher levels of classified overall lower loan balances stable non accruals and charge off levels and economic outlook for us as we're moving forward. It's why you still see a build in most of the industry right now because of concerns of office and others and then qualitative.
Jon Ciulla: And then John, I know you talked earlier about, you know, kind of the, the leverage loan and the sponsor, you know, especially sponsor book. But I, you know, I guess I wanted to better understand kind of like some of the final points of the details, the underwriting there and kind of the things you do to structure those loans to really give you protection. And I'm not expecting to speak to the specific credit, but, you know, like, you know, you all were on the right aid credit files for bankruptcy, but like, you know, the ABL.
Speaker 3: stable, non-accruals and charge off levels.
Speaker 3: an economic outlook for us as we're moving forward. It's why you still see a build in most of the industry right now because of concerns of office and
Speaker 3: And then qualitative overlays on what you believe is going on in any particular portfolio, like an office portfolio. So the classified certainly would have been a component to add more reserves, but there are some offsets like lower loan balances.
<unk> on what you believe is going on in any particular portfolio like an office portfolio. So the classifieds certainly would've been a component to add more reserves, but there are some offsets like lower loan balances and stability in other areas and then obviously the economic outlook is still uncertain, which drives too.
Speaker 2: and stability in other areas uh... and then obviously the economic outlook is still uncertain which drives to a few basis point increase and i'm giving you kind of a qualitative high level because obviously it's all modern mall driven at the end of the day and and team arts clandie on point out we sort of laid it out on page fifteen
Jon Ciulla: Philo notes in the market are trading at 92, 93% of power. And so like market obviously expects very little loss, you know, it looks like you got you guys in the other banks in a position to kind of get paid back first. You know, and it feels really well collateralized. So could you just kind of help us better understand the structure of those deals and what you kind of do to help protect yourself in the event that, you know, something goes wrong.
A few basis point increase and I'm, giving you kind of the qualitative high level, because obviously, it's all moderate model driven at the end of the deck and Tmr's Glenn the only thing I would point out as we sort of laid this out on page 15 of the slides you can see the impact of lower loan balances was $8 million and then the macro third quarter macro and <unk>.
Speaker 2: You can see the impact of lower loan balances was 8 million and then the macro, third quarter macro and...
<unk> environment was a build of <unk> 43, and if you look at the chart below there hasnt been that much movement really an unemployment and GDP growth and stuff like that so.
Jon Ciulla: Yeah, I guess there's a couple questions there because you threw in the ABL deal at the end, right? And so, you know, that's, I think that's a completely different animal. You're, you know, underwriting against liquidations value on a, on a large retail company. That's kind of standard asset based lending. I do think the market believes what everybody believes is someone will come in and provide this financing and there'll be an orderly liquidation and everyone will get paid out and we've seen that story play over and over again.
Speaker 2: build a 43 and if you look at the chart below there hasn't been that much
Speaker 2: you know, really an unemployment and GDP growth and stuff like that.
Speaker 2: A portion of that is risk migration, which you see in the classifies. That's how it sort of character.
A portion of that is as risk migration.
What you see in the classifieds and Thats, how it that's how I'd characterize it.
Speaker 13: Thank you and your last question comes from line of Lori Hunsaker of Seaport Research Partners. Your line is open.
Thank you and your last question comes from the line of Laurie Hunsicker of Seaport Research Partners. Your line is open.
Jon Ciulla: In sponsor and specialty, you know, business. I just, it's about the strength of the people that continuity we've been doing it for 20 years. We deal with sponsors. We know who support credits and have expertise in the industries and sectors therein. You'd be amazed at the level of diligence and detail we do in technology. If we're doing a deal of software as a service deal, you know, we're doing third party evaluations of the software.
Speaker 15: Great Hi, thanks John and Glencoe morning. So just wanted to circle back to office here. So slide four is great, but just wondered a couple things. Number one, can you help us think about specifically in New York City and Boston of that 1.17 billion?
Great Hi, Thanks, John and Glenn Good morning, Good morning wanted to circle.
I'll go back to offense here.
So slide four is great, but just wondered a couple of things number one can you help us think about specifically in New York City, and Boston of that $1. One 7 billion how much how much of that is New York City class a versus b, how much your thoughts on cost saves versus D. And then I'll take your slide four is the only investor can you help us.
Speaker 15: How much is New York City class A versus B? How much is Austin class A versus B? And then also your slide four is only investor. Can you help us think about the owner occupied book? How big that is? Any concerns that you're seeing there? Obviously, on our side is lower risk.
Jon Ciulla: We're evaluating the contracts. The end users were, we know the management team very well. We know the sponsors very well. We structure the deals. You know, that so there's some level of amortization. We don't chase as you know, the last couple of turns of leverage where the non banks are chasing. We plan a different market. So it's just the combination of having the right people are really disciplined approach staying in the swim lanes and the sectors that we know and understand and not, you know, moving off of that discipline process. And it's why through the great financial crisis and through the pandemic and through this higher interest rate environment, we've been able to see, you know, resilience in that portion. Folio.
Jon Ciulla: Got it.
About the owner occupied.
That is.
Any concerns that you are seeing there obviously on arthritis lower risk, but this does come at the same risks and then the last part of the answer to question that.
Speaker 15: of the same risk. And then the last part of the office question, the jump in past two loans from 46 million to 71 million, and roughly how much of that 20 million jump was office-related.
Jumping past due loans from $46 million or $71 million.
How much of how much of that $20 million jump was often correlated.
Speaker 3: Alright, I might ask you to come back on the last question, but the one quet, so the mix of A and B is pretty similar around 50-50.
Alright, I may ask you to come back on the last question, but.
One quick so the mix of a and B is pretty similar around 50 50.
Speaker 3: in all the markets, which also ladders up to the overall. We have about 23% right of that remaining offices in New York City, and that's about 50, 50 class A and class B. Boston is smaller in the geography under 10% of that, and it's also about 50, 50 in terms of class A and class B. You asked about
All of the markets, which also ladders up to the overall, we have about 23% right of that remaining offices in New York City and Thats about 50, 50 class a and class B Boston is smaller in the geography.
Jon Ciulla: And then the last one for me, I just wanted to ask her on the HSA book. I feel like this has been a topic that's come up sporadically, you know, over the last several years, but I wanted to ask just because other banks are, you know, looking to potentially monetize unique assets that they have. And so when I look at kind of what's happened, you know, in HSA, you know, it feels like, you know, some of your non-bank competitors have been able to really kind of pay really high multiples to acquire other HSA portfolios that otherwise, you know, I think if, you know, if they had the same investor base that you do, they wouldn't be able to pay as much.
Under 10% of that and it's also about 50 50 in terms of class a and class B you asked about.
Speaker 3: non-investor creed, owner occupied creed. So those would be C&I companies that we'd lend to where we have office collateral.
Non investor Cree owner occupied Cree, So those would be C&I companies that we lend to where we have office collateral that's a relatively small portion of our overall portfolio.
Speaker 3: That's a relatively small portion of our overall portfolio. It's around $250 million, which is pretty small. Regularly and internally, we underwrite those as, you know, CNI loans based on the cash flows of the company with having just the enhanced secondary source of repayment in the office. We've seen no deterioration in that portfolio at all. And what was the last question, Laurie?
Around $250 million, which is pretty small regulatory <unk> and internally, we underwrite those <expletive>.
Jon Ciulla: And so, you know, with the growth in that business line, kind of slowing to some extent, and, you know, the value of it really not showing up in the multiple and, you know, it being tough to kind of, in organic, we grow that business, you know, just just be able to give in that you're treated like a bank for others that are treated like non-banks. Like, how do you think about maybe, you know, monetizing that, you know, and, you know, doing something more strategic there to help your investors realize the full value of that business.
C&I loans based on the cash flows of the company with having just the enhanced secondary source of repayment in the office, we've seen no deterioration in that portfolio at all and what was the last question Laurie.
Speaker 15: Yeah, just the, and thanks for that. The jump in the past two loans, the 46 million to 71 million. How much of that, if any, was also? Oh, that's a great question.
Yes.
And thanks for that the jump in the past due loans 46 million to $71 million, how much of that if any with all SaaS.
That's a great question.
Speaker 3: Don't know if I know the answer to that off-hand, but I will tell you one thing is that there was a...
I don't know if I know the answer to that off hand, but I will tell you. One thing is that there was a <unk>.
Jon Ciulla: That's a great question. And I think all of your observations in general are correct. And we've talked about it over time. You know, the basic premise for us is that we have a very efficient way to deploy long duration low cost deposits as a bank that really helped profitability for us. And while the market has slowed, if you look at it, you're still, you know, growing deposits at very low costs in the mid to high single digits.
Speaker 3: a fifteen million dollar payment made on the second of October so one of them was an administrative delinquency and so that would tell you that we're down from forty two to whatever that would be twenty seven i can do my math right mostly equipment finance loans in there so it's it really wasn't commercial real estate
$15 million payment made on the second of October So one of them was an administrative delinquency and so that would tell you that we're down from 42, two whatever that would be 27, if I can do my math right, mostly equipment finance loans in there so it really wasn't.
Real estate is not yet.
Great.
Jon Ciulla: And there aren't many channels that are doing that. So, and we are continuing to grow along with the market on an organic basis. So I take your point in terms of the inorganic growth of some of the other other top five players. So it is very valuable to us. It helps us generate the kind of returns and profitability. We have albeit it's a smaller part of the whole after the MOE. We are frustrated that the market doesn't recognize the value that we're still building in that business as part of the bank.
Thanks.
You got it.
Speaker 13: There are no further questions at this time. I will not turn the call over to John Ciela, a CEO for closing remarks.
There are no further questions at this time I will now turn the call over to John <unk> CEO for closing remarks.
Speaker 3: Thank you very much for joining us on this long call this morning. Enjoy the day.
Thank you very much for joining us on this long call. This morning I'm joined today.
This concludes today's conference call you may now disconnect.
Speaker 16: Please wait, the conference will begin shortly.
Please wait the conference will begin shortly.
Sure.
Jon Ciulla: And as, as you know, we continue, we talk about it all the time to evaluate HSA in the bank and the value it has in the bank outside of the bank because we have an obligation to make sure that we're making the best decisions for our shareholders as we move forward. And so up until now, which continued particularly in this interest rate environment, it's pretty easy for us to say operating HSA as a division of our bank creates the most value for our shareholders in the long term in terms of the quality and the value of the cash flows.
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Jon Ciulla: We don't think the market, you know, where we're trading at a seven times multiple and future earnings is reflecting that unique company and business. And, you know, we want to continue to keep informing people and educating people about where we are. We were able to execute on the Ben transaction last year, which gave us, you know, higher levels of user experience and a better, a better mouse trap if you will. And I think it's helped us compete in the marketplace.
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Jon Ciulla: We are still looking every time there's a deal in the market of another portfolio because the market keeps consolidating. I think the top 10 now represent 83% of the market, you know, we'll try and be in a participant in that. But I think it's going to be a continue evaluation for us and we'll make the right decision on where HSA belongs given the value we can create owning it or the value that it would receive as a different company or a company that was part of a joint venture or somewhere else outside, back.
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Unknown Executive: Thank you for taking my questions, everyone. I appreciate it.
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Linda Daniel Tamayo: Your next question comes from Linda Daniel Tamayo of Raymond James. Your line is open.
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Linda Daniel Tamayo: Good morning, everyone. Thanks for taking my question. Maybe just starting in the decline in the commercial industrial, commercial loan areas and you talked about de-emphasizing some massive classes there. Just give a little more detail on where you were pulling back. And I apologize. I jumped on a little late if you already covered that. No, it's quite alright. It's a good question and we haven't covered it in detail. So, the decline across the board on the CNI side was generally driven by, we had mortgage warehouse obviously down.
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Linda Daniel Tamayo: And I think you'll likely can see that continuing to reduce from a strategic perspective we were very careful on transaction only ABL and equipment finance in the quarter since the crisis in March. And so, those did grow rapidly and may have had small declines. Our fund banking activity which high quality, you know, fund banking loans, equity subscription lines to private equity firms was down about half a billion dollars. And that was driven by one big payoff.
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Linda Daniel Tamayo: And then just lower utilization. Our overall middle market CNI utilization online after kind of holding steady for several quarters at 50% was down into the mid-40s. So, we did see seasonally lower usage and I don't know what that portends in terms of client confidence or anything. But utilization was lower as well. So, that kind of drove the quarter results. Some of it was us pulling back on levers. Some of it was a seasonally slow third quarter more sluggish loan growth.
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Linda Daniel Tamayo: And that's where we ended up. I think as you go forward, you know, we've talked about really making sure that we have the liquidity capacity to loan to deposit ratio in the capital to grow those full relationships across our middle market businesses, our other ancillary CNI businesses sponsor and specialty non-office commercial real estate. We are seeing some level of increased demand as we move into the fourth quarter. Our pipeline's up about half a billion dollars.
Linda Daniel Tamayo: So, I think we'll continue to see mortgage warehouse run down. There may be a couple of other small sub-scale businesses where we won't be generating the kind of loan growth that we've generated in the past. But we think we can offset that with, you know, our core franchise building loan generation.
Jon Ciulla: Terrific.
Jon Ciulla: And then on the flip side, the commercial classified loans were up both on our absolute basis and as a percentage of that portfolio, maybe you could talk a little bit about what drove that increase. Sure, happy to. First of all, I didn't say up in my front comments, but I did reference that that level of classified at 1.74% of a smaller portfolio in the quarter is actually a hundred basis points lower than Webster's classified percentage in the fourth quarter of 2019 before the pandemic.
Jon Ciulla: So just a reminder, again, that we've been, the entire industry has been benefiting from really, really favorable credit metrics. And this is just a small step, I think, towards a more normalized rate going forward. But in terms of the actual contributions there, there weren't any kind of correlations across geography, asset class, business line. We saw some CNI in healthcare. We had a small portion in ABL. We had some office migration that we talked about prior and then just generally across the other CNI categories. So it really wasn't, we didn't see correlated risk. We just saw credit-specific migration as part of our overall modest negative risk-grading migration in the Okay, terrific.
Glenn MacInnes: And lastly, just one for Glenn on the hedging strategy and how you expect the net interest income would react to rate cuts if they do materialize next year. Yeah, so Daniel, good morning. We did talk a little about that as we look, we're not providing an outlook for 2024 at this point. The point I made earlier is that I think our NIM will continue to be supported into the fourth quarter and into the next couple quarters through the benefit of both fixed rate loans repricing, investment securities repricing as well as the periodic loans repricing. Some of that will be obviously offset by deposit costs and are thinking on where the cumulative deposit beta will end up. But I think generally, that's how we're feeling going into the next couple quarters.
Unknown Executive: Okay, thanks for all the color guys. Appreciate it. Thank you.
Alex Lau: Your next question comes from the line of Steve at the exopoulos of JP Morgan. The line is open. Hey, good morning, everyone. Alex Lau on Steve. Hey, Alex. Hey, I want to touch on deposits. So not inspiring deposits were up on a period and basis in the quarter. What drove that uptick was a seasonal inflows? And is it fair to say that the customers chasing higher yield products in these demand balances are largely done?
Alex Lau: Yeah, so let me take that and John, but I think there is a portion of the increase in non-intersparing deposits that was related to the government inflow, which is seasonality. But I think you know, the bigger point is we've gone back and looked at DDA because we're, you know, as we look at our forecast and I've gone back to all the way back to 2019 when, if I could add the combination of Webster and Starlink, you know, we had about 40 billion in combined deposits.
Alex Lau: And at that point, the DDA represented about 21%. If I looked at the third quarter and did the same sort of analysis and I stripped out the impact of interlink that's relatively new, we'd be in that 21% range. So it's pre-pandemic and if I look to where we are, it's typically run about 21%. I think there will be some continued normalization in the average balances as customers move and we've looked at this on a customer by customer basis.
Alex Lau: So there is some migration into higher, higher yielding type of products. But I think some of that, so say, you know, I think we'll get normalization over the next couple quarters, but I think some of that will be offset by growth opportunities through whether it's new relationship, acquisitions, or treasury management type services. So I think if you think about that 11.4, we have, there'll be puts and takes on that, over the course of time, and we're not even done it for 24.
Alex Lau: That should be somewhere in the range. I agree with that line. And yeah, I think your last statement was right that we're going to continue to see a creep up of the deposit cost there in the core, but that the rate of increase is slowing down because the customer behavior, people that were more in tune, and it was more important to them to chase rate have done. Thank you.
Jon Ciulla: And speaking of growth opportunities, now that the conversion with Sterling is done, do you see any material cross-selling opportunities in terms of growing these demand deposits? Now that you're integrated with Sterling? Yeah, I mean, I think I kind of hinted to that, Alex, that you know, one of the things that's getting on our single core platform now and also being able to kind of pivot our resources to develop development and build out, we've got a robust plan on the treasury side in commercial, and that's broadly defined, you know, with cash management products, FX, capital markets, other products, corporate card, where we believe that having deeper penetration and having a broader product set for our really loyal commercial customers will have the added benefit of growing core operating deposits. So I do think that that's something that we believe we can execute on and we believe will be successful as we move forward post conversion. Thank you for that.
Jon Ciulla: And then I just want to have a follow up on the HSA business. So these balances, you know, for the past three quarters have been in the $2.2 billion range. Can you talk about what it would take, you know, in the macro environment for a stronger HSA adoption and for these balances to start increasing? John, I think you said mid to high single digit. How do we get to the higher end of the range?
Jon Ciulla: What age weaker job market actually benefit this range? Thanks. That's interesting. We used to answer these questions all the time, but I, you know, I think generally higher healthcare costs push push companies to higher adoption of full replacement, high deductible health plans. Definitely if it was in a recessionary environment, if labor market is not quite as tight, companies are more willing to move to higher replacement costs. I will tell you we believe that part of, you know, full transparency, right?
Jon Ciulla: Part of the reason the market slowed a bit is that there's been significant penetration and adoption now. So there aren't as many green fields in terms of new opportunities, but in this economic environment and in this job market environment, we have obviously seen slower growth. I'm not rooting for a worse job market or a bigger session so that we get a slight increase in our HSA growth, but those are some of the dynamics.
Jon Ciulla: There are higher healthcare costs coming in, so I do know that people are continuing to look at it and chat does see opportunity. And, you know, we're obviously got a lot of RFPs out there, but the market, you know, from the 20% growth days down to the 10% growth days. There's a lot of dynamics there, and it's not just economic. It's also just a maturing of the industry. Thank you.
Unknown Executive: Now that we're close to end of conference, we please ask that you try to restrict yourself to one question. So we can get everyone in the next question.
Bernard Gizycki: Custom line of Bernie Von Gizicki of Deutsche Bank. Your line is open. Yeah, hi. Good morning. Hey, my question's on fees specifically. So you talked about the pressure on fees from less capital markets activity, but you have seen signs of an improving outlook into next year. You know, what are you hearing from clients? You know, what signs do you see that helps drive that improving outlook? And maybe if I just combine this on the sterling integration, you know, you basically highlighted some areas in treasury cash management, but in the fee side, could you provide any size timing of these opportunities?
Bernard Gizycki: So calf markets pick up next year and sterling integration opportunities, sizing? Yeah, it's a great question. I think I'll stick with Glenn's comment that we're working through our plan right now for 24, and we haven't sized some of those opportunities in the timing of the rollout. As it relates to BAU and organic where we are, we didn't see in the quarter a relatively healthy level of non-interest income, and underneath that were some good signs, a little bit more of direct investment equity tag in income, which shows some more activity on the sponsor side, and that people may be getting more active as they normally do at year end.
Bernard Gizycki: And so that's a good sign for us as we move forward. Obviously, the swap market, given where interest rates are, has been kind of down, but we may see some more activity just given the fact that the Fed may pivot. So there's some decent signs, and then we'll be able to, as we give guidance into four, we run out our roadmap on plan, be able to maybe size some of the incremental benefit of post-conversion investment.
Glenn MacInnes: Thank you. Your next question comes from the line F. Kimmer, Brazil, of Wells Fargo. Your line is open. Hi, good morning. I'm just wondering what the remaining credit mark is on the sterling bulk, and then if you look at the link-order increase in allowance, how much of that is commiserate with the link-order increase in classified loans, and I'm just wondering kind of your expectation for allowance trajectory here, give them a bad perspective.
Glenn MacInnes: Yeah, a good question. You know, I always kind of like and just like answering these Cecil questions, because it's obviously a huge amount of work that goes into the modeling. Obviously, a classified loan has a higher reserve on it, so, you know, the dynamics in the quarter for Cecil would be higher level, the classified overall, lower loan balances, stable non-accruals, and charge-off levels. An economic outlook for us, as we're moving forward, it's why you still see a build in most of the industry right now because of concerns of office and others.
Glenn MacInnes: And then, you know, qualitative overlays on what you believe is going on in any particular portfolio, like an office portfolio. So, the classified certainly would have been a component to add more reserves, but there are some offsets like lower loan balances and stability in other areas. And then, obviously, the economic outlook is still uncertain, which drives to a few basis point increase. And I'm giving you kind of the qualitative high level because, obviously, it's all modern, mal-driven at the end of the deck.
Glenn MacInnes: Yeah, and teamwork is clean. The only thing I would point out is we sort of laid this out on page 15 of the slides, right? So, you can see the impact of lower loan balances was 8 million, and then the macro, third quarter macro and credit environment was a build of 43. And if you look at the chart below, there hasn't been that much. Management, you know, really an unemployment and GDP growth and stuff like that. So, a portion of that is risk migration, which you see in the classifies and that's how it sort of characterizes.
Glenn MacInnes: Thank you.
Laurie Hunsicker: And your last question comes from the line of Laurie Hunsicker of Seaport Research Partners. Your line is open. Great. Hi. Thanks. John and Glen. Good morning. So just wanted to circle back to office. Here. So slide four is great. But just wondered a couple things. Number one, can you help us think about specifically in New York City and Boston of that 1.17 billion. How much? How much of that is New York City class A versus B?
Laurie Hunsicker: How much is Boston class A versus B? And then also your slide four is only investor. Can you help us think about the owner occupied book? How big that is? You know, any concerns that you're seeing there? Obviously on our side is lower risk. But still some of the same risk. And then the last part of the office question that jump in past two loans from 46 million to 71 million. You know, roughly how much of how much of that 20 million jump was office related.
Laurie Hunsicker: Thank you. All right. I might ask you to come back on the last question, but that the one quet. So the mix of A and B is pretty similar around 50, 50 in all the markets, which also ladders up to the overall. We about 23% right of that remaining offices in New York city. And that's about 50, 50 class A and class B Boston is smaller in the geography. Under 10% of that.
Laurie Hunsicker: And it's also about 50, 50 in terms of class A and class B. You asked about non investor Cree owner occupied Cree. So those would be C and I companies that we lend to where we have office collateral. That's a relatively small portion of our overall portfolio. It's around 250 million dollars, which is pretty small, regulatory and internally we underwrite those as you know, C and I loans based on the cash flows of the company with having just the enhanced secondary source of repayment in the office.
Laurie Hunsicker: We've seen no deterioration in that portfolio at all. And what was the last question, Laurie? Yes, and thanks for that. The jump in the past two loans, the 46 million to 71 million. How much of that if any was also? Oh, that's a great question. I don't know if I know the answer to that off hand, but I will tell you one thing is that there was a $15 million payment made on the second of October.
Laurie Hunsicker: So one of them was an administrative delinquency. And so that would tell you that we're down from 42 to whatever that would be 27 if I can do my math right mostly equipment finance loans in there. So it really wasn't commercial real estate. No, yeah, it's not right. Thanks. You got it.
Jon Ciulla: There are no further questions at this time.
Jon Ciulla: I will not turn the call over to John Syula, CEO for closing remarks. Thank you very much for joining us on this long call this morning.
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