Q3 2024 Webster Financial Corp Earnings Call
Speaker Change: Good morning, welcome to the Webster Financial 3rd Quarter 2024 earnings call. Please note this event is being recorded. I would now like to introduce Webster Director of Investor Relations, Emlen Harmon to introduce the call. Mr. Harmon, please go ahead.
Emlen Harmon: Good morning. Before we begin our remarks, I want to remind you that the comments made by management.
Emlen Harmon: may include forward-looking statements within the meaning of the private security litigation reform act of 1995 and their subject to the SAF Harvard Rules. Please review the forward-looking disclaimer and SAF Harvard language in today's press release and presentation for more information about risks and uncertainties which may affect us.
Emlen Harmon: The presentation at Company Management's remarks can be found on the company's events or relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant asks just one question and one follow-up prior to the poor returning to the Q.
Speaker Change: I'll now turn it over to Webster Financial CEO, Chairman John Ciulla.
John Ciulla: Good morning and welcome to Webster Financial Corporation's third quarter 2021 earnings call. We appreciate you joining us this morning.
John Ciulla: I'm very pleased to welcome Neil Howland as he is joining his first earnings call as Webster CFO. As we anticipated Neil, I'll hit the ground running since he officially stepped into the role in mid-August and you can already see the impact of some of the steps his team has taken to optimize the positioning of our balance sheet and grow interest income in this quarter.
John Ciulla: Luis Masiani, Webster's President and Chief Operating Officer is also joining us for the Q&A portion of the call today. I'll provide remarks on our high-level results and operations before turning it over to Neil to cover our financial results in greater detail.
John Ciulla: We're really pleased with our strategic and tactical accomplishments in the quarter. I'll hit the highlights and Neil will provide more details.
John Ciulla: We grew to positive 3.6% in the quarter, including growth in DDA, overall commercial deposits, and HSA.
John Ciulla: We grew loans.7% in the quarter, consistent with our full-year growth expectations, excluding a $300 million secureization and we performed to reduce our creconcentration, our growth was 1.3% in the quarter, with accelerating growth in CNI categories.
John Ciulla: We further reduced our creek concentrations through payoffs and reclassification of certain health care-related loans.
John Ciulla: As a result, our free outstanding as a percentage of 21 capital and reserves declined from 285% to approximately 265% at the end of Q3.
John Ciulla: Our net interest income grew quarter of a quarter and increased over last year's comparable period in line with our full-year expectations. We benefited from asset growth and a balance sheet repositioning.
John Ciulla: We continue to mitigate our asset sensitivity, positioning us well as rates continue to come down.
John Ciulla: Our capital levels remain strong, with our CET-1 now in excess of our current operating target of 11%. Resulting from earnings and capital optimization activities, providing us capital flexibility in 4Q and beyond.
John Ciulla: Our expenses remain well managed, resulting in a third quarter efficiency ratio of 45% still in an industry-leading position.
John Ciulla: On that turn to our financial performance for the quarter beginning on slide two.
John Ciulla: On an adjusted basis for the quarter, we generated a return on average assets of 1.22%. And a return on tangible common equity of 17.3%.
John Ciulla: are adjusted EPS with a dollar 34, our profitability and return metrics for main favorable to peers, again in this quarter.
John Ciulla: At this point, most of you are familiar with slide 3, which illustrates our diverse and versatile deposit base. As I mentioned up front, our robust growth this period came from a breadth of the segments on the slide, including lower-cost channels in our commercial bank, HSA bank, and a metros.
John Ciulla: We executed on the $400 million deposit opportunity for HSA bank we discussed last quarter, which provided a nice boost to deposits there.
John Ciulla: Strong execution within the commercial bank added to lower cost funding growth as well.
John Ciulla: Our ability to generate low cost funding across a number of business segments continues to be a tremendous advantage in growing our balance sheet efficiently and profitably.
John Ciulla: Moving to slide four, I will review our commercial real estate portfolio, and that has been a continued focus of investors.
John Ciulla: The segment of the Creep portfolio on which we have been most focused continues to be in traditional office.
John Ciulla: The portfolio balance continues to shrink with 917 million in outstandings of quarter-end, down roughly 45% from the first half of 2022.
John Ciulla: We did see some continued negative migration this quarter with non-accrual loans, increasing to 14% from 9% last quarter, largely as a result of two larger credits. We continue to be proactive in identifying and managing problem credits and prudently managing reserves in the sector.
John Ciulla: While there's been an investor focused, there have been no significant changes in the quality of our rent regulated multi-family portfolio or credit performance has held up consistently well.
John Ciulla: On credit more generally, we continue to see negative risk grading migration in the quarter as we keep a close eye on credit at a later stage in the cycle.
John Ciulla: We did see our non-accrual loans increased by $50 million this quarter primarily driven by the aforementioned office portfolio migration.
John Ciulla: Outside of Cree Office, negative migration was generally credit-specific across the portfolio, and not driven by one industry sector or ATTEC class, all the health care-related portfolios continue to show some weakness.
John Ciulla: While we have seen continued migration and will continue to be proactive in our risk reviews, our realization of loan losses remains in the range we have observed in recent quarters and importantly is consistent with through the cycles and pre-pandemic commercial annualized charge reference.
Speaker Change: With that, I'll turn it over to Neil to cover our financials in more detail.
Neil Howland: Thanks, John, and good morning, everyone. I'll start on the slide five with our gas and adjust earnings for the quarter. On an adjusted basis, we reported net income to come as shareholders, $230 million, and the loot at EPS of $1.34.
Neil Howland: Adjustments consisted of a pre-tapped $20 million security's repositioning charge, a $16 million impact from the exit of non-court factoring operation, and a $22 million of strategic restructuring costs.
Neil Howland: Turning to Flight 6.
Neil Howland: Total assets were $79 billion at period end, a $2.6 billion from the second quarter, mirrored by robust deposit growth of $2.2 billion. Deposit growth was aided by seasonal surge in public funds of $1.1 billion. As a result of the substantial deposit growth, we are holding higher cash balances than we have historically.
Neil Howland: We also exhibited solid loan growth of 1.3% excluding the securitization, the loan to deposit ratio was 80.5%.
Neil Howland: The tangible portfolio increased the $33.25 per common share, with the increase from the prior quarter driven by maintain earnings and positive movement in AOCI due to the low rate environment.
Neil Howland: Capile levels improved significantly. The common equity tier 1 ratio with 11.23% of 64 basis points linked quarter. And our tangible common equity ratio with 7.48%.
Neil Howland: In addition to the internal capital generation, the TCE ratio benefited from the improvement in AOCI.
Neil Howland: The common equity tier 1 ratio will also benefited from several actions we undertook to optimize asset risk waiting as well as the secureization. In total, these actions added 44 basis points to our common equity tier 1 ratio.
Speaker Change: Low Trends are highlighted on Flight 7.
Speaker Change: and total loads were up 374 million, or 0.7% linked quarter, excluding CR-E, other loan categories grew by 3.2% this quarter.
Speaker Change: Commercial real estate balances were down 570 million as we experienced the natural attrition in addition to the skiridization. This accelerates our path to our target of 250% of capital plus reserves.
Speaker Change: The Securization, Breathe Capacity, and allows us to add commercial real estate relationships with attractive risk reward characteristics.
Speaker Change: The field on the portfolio is flat, given the mix of new load originations and repricing your floating-rate loans on the September Fed Move.
Speaker Change: We provide additional detail under part of this on Friday 8.
Speaker Change: We grew a total of deposits by 2.2 billion with diverse growth across categories. The page was accelerated in order due to seasonal inflows of public deposits in the discrete opportunity with an HSA bank that added 400 million of low-cost deposits.
Speaker Change: DDA balances increased by over 700 million in this quarter, with the majority of the increase coming from seasonal effects. However, it is still encouraging to see normalization in the DDA balances after several quarters of the clients.
Speaker Change: Moving to slide 9, net interesting come with a 18 million from the prior quarter, driven by balance sheet growth and higher earning asset yields. A just and non-interesting come with a 1 million, adjusted expenses were up to million and the provision decreased by 5 million.
Speaker Change: Excluding adjustments, our tax rate was 22.2%, overall adjusting that income was up 14 million relative to the prior quarter. Our efficiency ratio was 45%.
Speaker Change: On slide 10, we highlight net interest income, which increase 18 million or 3.1% linked core, driven by balance sheet growth, and the increased burning acid yield.
Speaker Change: The net interest margin was up 4 basis points to 336. Our yield on earning assets increased 4 basis points over the prior quarter, with low yield flat and the securities portfolio of 24 basis points.
Speaker Change: In the third quarter, we incrementally sold securities with a book value of 34 million and reinvested with an approximate 400 basis point improvement in yields with minimal impact to capital ratios. We anticipate and earn back to less than two years.
Speaker Change: On that, we were able to maintain our total deposit cost effectively flat for the quarter.
Speaker Change: By 11, illustrates the progress, westerns made in mitigating its access to this tip of the year over the past three years by increasing the duration of our assets and reducing the duration of our liabilities.
Speaker Change: On slide 12, it's not interesting, which was up 1 million versus prior quarter on an adjusted basis. Adjusting income included both a 3.8 million negative CDA and 4.4 million gain on the secureization. We continue to experience pressure on core regret.
Speaker Change: You're over year, these are up 3 million, including the impact of the mutual attack position, offset by you over your changes in CBA.
Speaker Change: Non-Educers' expense is on slide 13. We reported a just expenses of 320 million up to million for the prior quarter, driven by modest increases in technology, human capital, and occupancy cost.
Speaker Change: twice 14 details components of our allowance for credit losses, which was at 19 million relics into the prior court. After booking 35 million in net charge off, we recorded 54 million provision, primarily due to credit factors.
Speaker Change: As a result, our loud coverage to loans increased to 132 basis points from 130 basis points last quarter.
Speaker Change: Blides 15 highlights are key asset quality metrics, as you can see on the four charts we've continued migration in the quarter. Netchar jobs came in at 36 million versus 33 million in the prior quarter.
Speaker Change: On slide 16, we enhanced our already strong capital levels. As we noted previously, we took several actions to improve our capital ratios in the quarter, including reviewing the risk weighting of our multifamily, lender finance, and public sector portfolios, as well as the securitization of multifamily levels.
Speaker Change: These actions in combination with organic capital generation and lower AOCI losses led to a significant increase in our capital ratios this quarter.
Speaker Change: I'll wrap up my comments on slide 17 with our outlets in the fourth quarter. We've best loans to grow by 1 to 1.5% with growth across the diverse categories, including the potential for some modest growth in commercial real estate.
Speaker Change: We are anticipating deposits will decline by around 1% at seasonality in the public funds business leads to outflows.
Speaker Change: We expect an energy-sinkum in the range of 590 to 600 million on a non-FTE basis.
Speaker Change: This is within the guidance range we provided on the second quarter earnings call. Our net interest income outlet assumes 50 basis points of cuts in the first fourth quarter, with 25 basis points each in November and December.
Speaker Change: Adjusted non-interesting count will be 85 to 90 million dollars. We anticipate adjusted expenses will be in the range of 335 million with an efficiency ratio in a mid 40s.
John Ciulla: Our New York term common equity tier 1 ratio remains 11% with that alternative back to John for closing remarks.
John Ciulla: Thanks Neil. I'm anticipating we'll receive questions on our priorities for capital allocation, given the sharp increase in our capital ratios in the quarter.
John Ciulla: While we continue to prioritize funding organic, balance sheet growth and complementary tuck-in acquisitions, our capacity to return capital to shareholders has increased since the second quarter, and we will be prudent and proactive managers of capital.
John Ciulla: We're well positioned to maintain our profitability profile, as Neil details we have proactively managed our balance sheet over the past year to ensure stable net interest income in a declining interest rate environment. Both in terms of managing our funding costs and tweaking the profile of our earning assets.
John Ciulla: We have capacity and capability to grow our balance sheet via a diversified mix of loan and deposit categories while at the same time maintaining flexibility on capital allocation. And our efficiency ratio remains among the best of our peers.
John Ciulla: We've retained superior profitability even as we invest in people processes and technology.
John Ciulla: On the latter over the last 24 months we have made significant investments to strengthen our technology foundation, including the modernization of our core banking platform, building advanced BSA, AML competencies and heightening our cybersecurity and cloud capabilities.
John Ciulla: Finally, I'd like to thank our colleagues for their continued effort. Their hard work is reflected in our performance this quarter, particularly in our strong deposit growth in favorable categories. Thank you again for joining us today. Operator, we will open a line to questions.
Speaker Change: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. We ask that you please limit yourself to one question, and one follow-up, then rejoin the queue if needed. Please ensure your line is not on yet when called upon.
Speaker Change: Your first question comes from the line of Chris McGraddy with KBW, your line is open.
Speaker Change: take money one yourum
Chris McGraddy: Maybe John and Neil, the actions he took with the balance sheet, obviously set up for a better, more neutrally positioned balance sheet going into 25. How do we think about, I guess, trough NII is cue for the trough? How are you thinking about it given you freed up a little bit of space on the balance sheet? [inaudible]
Chris McGraddy: Yeah, baby, I'll leave it there.
John Ciulla: Yeah, so, you know, we came in at 336 for the quarter. Can I ask you look at how we exit Q3? We're going to be holding a little bit more cash on the balance sheet, which in Q4 will have a slight drag to NIM. So we're kind of in the Q4 going to be in, you know, 332 range and having that exit loss in the next year, and then kind of staying right in that level into 25 is how we think about NIM. So we think we're at a stable NIM. We may be plus or minus 3 basis points as we move forward, but that's the range we're looking at going forward.
Speaker Change: In the 25th. Okay, perfect. And then my follow up John, you alluded to the capital return flexibility. Could you maybe just rank order and also the timing of which you think you might be able to return more capital?
John Ciulla: Yeah, I mean, I think, you know, we always talk about kind of prioritizing for organic balance sheet growth, thinking about doing things like we've done with Amitro's and Interlink and Ben, and then obviously if there's no other productive use of capital, I do think, given where we are, and the fact that we do think with interest rates coming down, that we should see an inflection point in credit as we get into this quarter in the first half of 25 that we're more likely to begin repurchases again, absent other organic opportunities to deploy that capital, Chris. So I think we're there, we feel really good about our capital levels now, we have some more flexibility, so we're more likely than we were...
John Ciulla: or before, in the next quarter or two, to begin share of purchases, absent, other uses of organic deployment.
Speaker Change: Perfect, thank you.
Speaker Change: Your next question comes from the line of Jared Shaw with Barclays, your line is open.
Jared Shaw: Thank you, morning, guys. Thank you.
Jared Shaw: You know, looking at maybe long growth as we exit 24 going into 25, how much additional a tertiary headwind should we expect from CRE, it sounds like maybe not that much but
Jared Shaw: and should we anticipate that maybe the overall long-growth rates start to accelerate as we exit the year going into 25.
Speaker Change: Yeah, I mean, it's a great question, right? Long growth has clearly been muted for the industry in the last couple of quarters.
Speaker Change: We did have a really good quarter in many core C and I categories and I will say that that sort of pull through has continued early on in this quarter. Although we know that the fourth quarter is also subject to significant prepayments, and there's a lot of activity, particularly on transactional sponsor and specialty deals, so that's why we didn't really change our guidance for the fourth quarter. I think you've heard me say, for 10 years or so, we've been able to grow commercial categories in the high single digits.
Speaker Change: to around 10%. I think right now, our view of 25, Jared, is that, you know, we see there's continued kind of modest loan demand. So I think right now, we think about next year as a 5%ish kind of loan growth, you know, we're going to give formal 25 guidance when we get into the January call. Could we outperform that? Sure, I think I've always said, I think we can kind of perform at or better than whatever the market allows. But I think if you read what others are saying and we look kind of at activity, I think 25 may not be a blowout year but be more modest and similar to this year with respect to loan growth.
Speaker Change: With a secure question about mix and commercial real estate, you know, obviously we're really pleased this quarter And I think there's a bit of a template there for us. We had significant organic tree payments
Speaker Change: which I know many others in the industry have reported over the last couple of quarters in Cree and then we did this securitization which actually was economically beneficial to us in terms of the gain on the transaction and we look at that not as just trying to drive down Cree balances as much as we can but it gives us capacity to support our really good clients and in full relationships. We're really good at it and so you will see some level of origination there and then at the end of the day as we grow our capital base.
Speaker Change: and we grow our other C&I classes. You'll see either flat to modest growth overall in Cree with our ability to maybe exit non-strategic Cree relationships, but I think we showed this quarter we can still grow loans at market while not relying on outsized Cree growth.
Speaker Change: That's a great color. Thanks. And for my follow-up on the deposits side, you know, really good, good trends there. You know, as we're entering the enrollment season, what are your thoughts on maybe HF?
Speaker Change: Yeah, Adrian, Luis, we feel good. Well, do you think that there could be some pressures or opportunity?
Speaker Change: Hello, hey Jared, it's Luis. So we do see, you know, we've seen pretty good early indicators that the enrollment season is going to be, you know, it's good as we've seen, you know, in the recent, you know, a couple of years. So, you know, we've made a fair amount of investments in, you know, a bunch of contracting technology. We launched the new investment management platform that you may have seen. We rolled out earlier this year. And so we feel very good about the investments and how we positioned the continued position. Each state business and we think that you're going to see similar to slightly, you know, more, you know, faster to public growth in 2025, relevant to what we saw this year. So we feel we feel good about what we're going to say is today.
Speaker Change: And Jared, as we usually do in January , we'll be able to give you kind of a first look at new business and what we anticipate. And then obviously at the end of the first quarter, we kind of can can final tally what's come in. But I agree with Luis, I think it was a good selling season for HSA.
Speaker Change: Great, thanks a lot.
Jared Shaw: Thank you.
Speaker Change: Your next question comes from the line of Mark Fitzgibbon with Piper Samler, your line is open.
Mark Fitzgibbon: Hey guys, good morning. Jon, the real deal published an article late last week suggesting that you guys have two large office loans in New Jersey that are in default to the tune of about 140 million. I guess I'm wondering, are these on non accrual in the third quarter? And do you have any specific reserves against them?
Speaker Change: Thanks for the question mark. Both of those loans, and let me make a couple of comments. Obviously, with a $52 billion loan book, we don't generally comment on specific.
Speaker Change: Relationships, single point exposures, litigation, and so on and so forth. But obviously this has become a bit public. So what I will tell you is...
Speaker Change: You know, the highlight numbers there are significantly overstate Websters exposure. Those were two loans originated pre-merger.
Speaker Change: One has a Webster exposure under 45 million. The other one is Webster exposure under 25 million.
Speaker Change: Both of those loans are on not a cruel at the end of the third quarter. Both of those loans have obviously been reviewed and there have been the appropriate charge offs and specific reserves put against those loans. As I mentioned in my early comments, two office loans drove the significant or not that what the increase was in non performers in the quarter. Those were the two loans. And we took charge offs that contributed to the overall $36 million charge in the quarter.
Speaker Change: You know, that's what I'll tell you, you know, office charge loss, we're 55% of the charge loss.
Speaker Change: in our quarter so you can kind of triangulate from there. But, you know, we're pretty good about making sure that we are proactively managing things that things go non-performer when they're supposed to go and taking charges that we're supposed to take. And so, you know, the good thing about being a company our size right now is we've got significant earnings power. We've got, you know, a very high low-moss reserve compared to our pure median. And so, this quarter, it really didn't have an impact on our overall financial performance. And we feel pretty good that we've got, you know, enough reserves in...
Speaker Change: Not only those two loans, but in our overall pre-portfolio that we continue to work down to not have there be a material financial impact as we move forward.
Speaker Change: Okay, that's great. And then just as a follow up, John, you guys have done a great job shrinking the office book. I guess I wondered if you could share with us what the reserve on the office portfolio is right now.
John: Yeah, I think it's up six percent, Mark. You know, I'll give you again, I'll repeat what I said, Jason Ed talked me when the portfolio was a billion dollars a quarter or so ago. You know, we talked about there being about a third of that, which is kind of hand-to-hand combat that we're working through.
John: These two credits that I just referenced in the U.S. about were obviously in that, you know, kind of...
John: III of difficult working through. We've got about a third of the portfolio that we don't worry about. It's highly lease that have, you know, long dated maturities and then the stuff in the middle, you know, we continue to kind of just actively manage and we think we've got enough secondary intershary support as well as, you know, in place leases to kind of work through. So when you think about 6% on the overall 917 million that's left. Remember there are some specific reserves. As well. And when you think about the reserving, we feel comfortable about it because it's really against that one third of the portfolio that's that's that's most problematic for us.
Speaker Change: Thank you.
Mark Fitzgibbon: Thank you, Mark.
Speaker Change: Next question comes from the line of Matthew Grease with Steven. Your line is open.
Matthew Grease: Hey, good morning, everybody. I was hoping you could talk a little bit about expectations around loan and deposit betas over the next year or so, whether you've had any early success, tweaking and lowering deposit costs, if so, where. And then the other side of the coin is just given over the quarters you've reduced asset sensitivity, whether or not you think full cycle loan beta will match what we've seen during the heightened cycle, which was kind of the low 50% increase.
Speaker Change: Yeah, I'll jump in there, you know, I think.
Speaker Change: Obviously, we had our first cut in the cycle, 50 basis points, and we took pretty quick action on the deposit portfolio, and we repriced down 27, 28 billion dollars to that portfolio of our deposit portfolio about a 60% beta. So, it's kind of, you know, 16 billion and 100% beta, or if you look at our total book, about 25% beta so far. Our interlinked deposit is basically 100% almost immediate beta, and those are over $7 billion. We saw some nice pricing down in our commercial deposit portfolio, now 60% beta so far on our online portfolio with Boreo. And then a bunch of different moves that are consumer.
Speaker Change: for Bolio through the first cut, so we're feeling pretty good there.
Speaker Change: You know, as you take it step back and look at our overall portfolio, within the next year, we expect.
Speaker Change: Approximately $30 billion of our loans and securities and cash to reprise. That's $28 billion on loans and $1 billion in security. So our security's book is fixed and long with less than a billion out of our $17 billion portfolio, they're variable. So we kind of look at that as the repricing side on the loans. [inaudible]
Speaker Change: and if you flip to the deposit side, you know, in the first five quarters of the up cycle, we saw 34% beta, and we're anticipating approximately 30 beta of 30 in the first five quarters down. And if you think about a 30% beta on a $65 billion portfolio, you do the quick math there, and that's about 19 to 20 billion at 100% beta. We have short borrowings, $3 billion or $4 billion, we'll mature this quarter and next.
Speaker Change: We've got a $5 billion hedge portfolio that helps support our current positioning.
Speaker Change: And then there's another large factor for us is that we have approximately 5 billion affixed rates securities that mature and turn annually. And those are anticipated to roll over, roll off at about 4% and roll back on with new originations in the 60s.
Speaker Change: percent range. So 200 basic points are so up. So when you kind of put all that together, we have a pretty well balanced position going into next year. And as you can see in our model results, a very neutral positioning, despite us having a fairly large portion of variable rate load. So along the answer there, but I know it's an important topic and I think that the team has done a really good job in positioning us for this down rate environment.
Speaker Change: I appreciate all that, thank you. And the follow-up is just on expenses, expectations around expense growth, you know, over the next year or so, specifically, it relates to preparation for 100 billion. Should we expect any acceleration that come in quarters or year in expense growth as you get ready for this? And what areas do you expect to address as you kind of be found in infrastructure? Thank you.
Speaker Change: In that thank you for the question and this may leave you a little one thing for more, but as we said, we're finishing up right now with PWC, our gap analysis and our...
Speaker Change: and our plan for our March to category four. I always remind you that we're three to four years away from an organic growth perspective in hitting a hundred billion dollar category. And as we mentioned before, there will be additional expense for us to get there in terms of hiring people and building out reporting capabilities and technology and obviously the expense of T-Lac. And we're going through right now kind of the cadence of running that through and our plan is, as I mentioned last quarter, that in January , when we give our 25 guidance, that will include kind of our fully loaded assumptions about what that means for expenses. I also remind you that we have the three to four years to
Speaker Change: to spread those expenses out. And, you heard Neil mention earlier, for example, that we took some charges on, on severance and reorganization in the quarter. And a lot of those moves in terms of exiting non-core businesses in looking at our organization will free up dollars. [inaudible]
Speaker Change: to Invest. So as we move forward, you're going to get the answer to the question in January in our 25 guidance. We think that that will put additional pressure on our expenses, but it won't be material. We still feel very confident in our ability to deliver outside returns as we go through this process. And so, you know, you know, I don't know if you want to put a little bit of more flavor around that. But yeah, I think you just said that well. Well, Jon, and you know, one of my initial concerns coming into the organization was, hey, we're running at a 45% efficiency ratio. Are there really opportunities to find more efficiency? And as Jon mentioned, the team had done a nice job putting together a small program. And with the restructuring charges, we took this course.
Speaker Change: or we expect our expense run rate next year to drop $17 million, which won't flow all to the bottom line. We'll use some of those dollars to reinvest and prepare for category 4. So I think it's an example of how we can continue to find efficiencies, to pave our way to that kind of the requirements. And as Jon mentioned, we'll talk about specific numbers in Q1, but you know, if you take a step back, we have an expense base, it's just over $1.3 billion. So 1% of that is $13 million. If you add a percent to our expense growth rate over the next four years, you know, that probably hits a good chunk of what we need to build. I'm not saying that that's what's going to happen, but just kind of highlighting that it should be some incremental or
Speaker Change: on the edges, all the expense side versus kind of a big pop-up of one time expenses. As the current view, but as John mentioned, we're not fully through the analysis on preparation, and we're making good progress there, and we'll give more details than you want.
Speaker Change: I appreciate all that. Thank you. That's all I have. Thank you, Matt.
Speaker Change: Your next question comes from the line of Daniel tonight, with Raymond James, your line is open.
Speaker Change: Thank you, good morning, everyone.
Speaker Change: I guess first just a follow-up on the credit side. John , I think you mentioned an inflection in credit could lead to the possibility for increased repurchase is going forward, but how should we think about that? Do you think that non-accruals are at or nearing a peak here? Obviously, there's some uncertainty with how the whole office loan environment plays out, but just curious how we should be thinking about those non-accrual and early-stage credit levels and how that plays into your thinking on net charge-ups as well.
Speaker Change: Yes, it's a terrific question and one that I love answering just because it's difficult to predict.
John Ciulla: You know, we mentioned in the last quarter that this quarter would be, you know, less worse if you were and we were marginally less worse. We've been through the entire portfolio. We are getting to a point where I think we've identified obviously all proactively all the real issues in the portfolio that we go through and, you know, again, remind everybody that if you look at our absolute statistics, they're kind of still in line with three pandemic statistics. So I know a lot of CEOs are saying, we're trying to remind everybody that this hasn't been a cratering of credit. It's been sort of a return to normalcy on credit. You know, our hope right now and what we're looking at is we've got, you know, interest rates coming down.
John Ciulla: We've already seen an increase in commercial real estate refinancing activity based on the behavior of the five-year and the forward curve. And so as interest rates come down, if the Fed navigates this soft landing, I do think that we should see running through back TNLs and back balance sheets, an inflection point in credit, certainly in the first half of 25. It's tough to call a particular quarter. We have seen some negative risk rating migration. We've been pleased that that migration has not continued to result in higher levels of annualized charge ruffs. And so it would be difficult for me to say, hey, we think pork used the bottom, but I do
John Ciulla: I think all the macro factors and our understanding of our portfolio that the first half of 25 we should start to see kind of absolute improvement in the balance sheet. And obviously, we have a forward look based on where we're trading. If you're asking the question with respect to capital allocation and return of capital, you know, we've got lots of earnings. We've got really good reserves. So, you know, we'll put that all into the box and decide whether or not in the fourth quarter we start by back. Or whether or not that's the first half of 25 activity. [inaudible]
Speaker Change: Okay, terrific. Thanks for all that color. And then changing gears here just looking at long growth, the long growth side. You talked about how the fourth curve quarter could be impacted by some.
Speaker Change: Slower, perhaps C&I and sponsor with the head when you mentioned specifically prepayments, but just curious, you know, the pace of growth in the third quarter, what you saw there, if that picked up near the end of the quarter, if it was relatively steady and then, and then just also curious on the residential side expectations for, you know, how much you're going to be adding to the portfolio relative to the other sides of that. Thanks.
Speaker Change: Yeah, our primary focus is continuing to grow a myriad of C&I categories. I would say the lone behaviors in the third quarter, interestingly, that 1.3% growth, if you take out the securitization, it was sort of more back ended if you will in the quarter, which gives us some momentum on NII as we go into Q4. And as I said, we've continued to see pull through in the early in the fourth quarter, the reason we didn't have the guidance is because we know there's a lot of activity both on origination and prepayments in the quarter and we don't really have full visibility yet. I think we still have pressure on our sponsor and specialty business from the proliferates.
Speaker Change: of Private Credit. We're going to have our asset manager program, hopefully up and running in the first quarter, which should give us some additional momentum there. Our middle market perform well, our public sector finance perform well. We've got other levers to pull in asset-based lending and in equipment finance. [inaudible]
Speaker Change: So, I think with our portfolio, we'll continue to be able to grow C&I categories. You'll probably see some level, as Neil mentioned, of modest growth in commercial real estate because right now, if you're good at it and you can get really nice risk reward because there are fewer players in the market. And then I think we'll sort of fill in with our mortgage originations, obviously serving our customers in our market. And then some level, of course, fondant mortgage origination. So I would say it's balanced and unbalanced, you know, we still think that kind of 5% if 5% ish, annualized, low and growth is the right number.
Speaker Change: Your next question comes from the line of Bernard von Gizicki with Deutsche Bank. Your line is open.
Speaker Change: Hey guys, good morning. So on page six of the deck, you know, you noted that you've identified and documented certain loans eligible to optimize RWA treatment. And I know you've been talking about this on the call, but just to elaborate a bit more on these actions. And if you could, you know, size, how big this was to capital improvement during the quarter. Thank you very much.
Speaker Change: Yeah, so I think all of our actions in total were about 44 basis points to the quarter. We really went in and did deep dive into our multi-family lender finance and public sector portfolios and looked at the risk-weighting. And I'll give you an example kind of in the public sector, we had a lot of loans sitting at 100% risk-weighting and general obligation bonds can be at 20% and revenue pledged at 50%. So we did a lot of work to pull additional data and really optimize our risk-weighting there. That's one example across the category. So hopefully that and in the, as we mentioned the securitization also helped drive increased capital level and that was about six basis points.
Speaker Change: Included in that 44 that I just mentioned.
Speaker Change: Okay, I got help from him.
Speaker Change: Great! Oh!
Speaker Change: And then on expenses, you know, obviously with technology, you know, you're basically highlighted, you've been making significant investments in the tech stack, you know, modernizing the core banking platform, the BSA ML, sub security cloud capabilities. You know, during the quarter, you're also highlighted the tech spend increase, sequentially, professional services and occupancy costs. Can you just provide some color on those for the quarter on the tech professional and occupancy?
Speaker Change: Specific, what should we, we're not your question, being a specific expense is related to those initiatives for the quarter, because we don't really think about it that way, I think that this is.
Speaker Change: Now, every year we look at a rolling through year, technology, roadmap and investment initiatives.
Speaker Change: Everything that you highlighted there and that we highlighted in the specific items that you were talking about are part of.
Speaker Change: No long-term strategy that we've been now that we've been deploying. So there's nothing really new there that we would isolate as something that's going to be recurring long-term in nature.
Speaker Change: Um...
Speaker Change: You know, Neil alluded to what we expect the expenses are going to be and you know what the progression of those are going to be in the 2025 and you know, all you know that that estimate of projection includes everything that we think you're going to be required to continue to modernize the text back, build out the text back and rest in the various business bonds, and investment risk management platforms and so.
Speaker Change: It's all inclusive, but we provide that guidance for 2020, but I think we don't envision that there's going to be any outside.
Speaker Change: You know, tech's been in the Emlen 20 Fire Brothers, what you've seen this year is what we feel. Again, we feel pretty good about what our technology roadmap is and we have a clear path to making the investments in specific areas to support client experience, so at the same time building out risk and operating platforms.
Speaker Change: Okay, great. Thanks for taking more questions.
Speaker Change: Joe, thanks for all.
Speaker Change: Your next question comes from the line of Lori Hunsicker with Seaport. Your line is open.
Lori Hunsicker: Yeah, hi, good morning, gentlemen, and Neil welcome. Just to go back to office here and certainly appreciate office as only 2% of your book, and you've been very proactive and transparent. But on your 54 million of loan loss provisions that you took this quarter, how much of that was office and then of the two loans.
Lori Hunsicker: that are new and now performing that 45 million and 25 million. Can you help us think a little bit about, you know, what is the occupancy, what's the new debt service there, and then specific reserves on those two loans, you know, certainly under the backdrop that you gave Mark office reserves or 6% or 55 million. Basically of your 55 million, what are the specific reserves on those two loans and then just sort of final question here on office. Thank you.
Speaker Change: on specifically that $45 million exposure that bank well just filed. They're a part of it. And you guys, it looks like we're the lead. IE Sterling was the lead. Can you just help us think about, you know, again, this is just per the bank well filing that there was a refresh property appraisal done in April at 105 million. And then five months later, that property is now worth 36 million. So if you could just help us think. IE Sterling was the lead. IE Sterling was the lead. IE Sterling was the lead.
Speaker Change: through any part of that that would be really helpful.
Speaker Change: Yeah, I don't think first of all I don't have all of that information and I don't think
Speaker Change: I can give you very good answers there, I mean I'll tell you with respect to Cecil and the provisioning for the quarter.
Speaker Change: There are so many in and out that you can't identify the amount of the provision related to a specific credit or even to a specific portfolio because what you're doing is refreshing and updating your risk ratings along with your qualitative factors and you're coming up with a refreshed life of loan losses for a $52 billion portfolio. So, certainly the amount of charge offs impacts what you provide, but it doesn't necessarily [inaudible]
Speaker Change: immediately correlate with where the charge-off came from. So I don't think I can draw a connection to those two loans to our provision. I gave you the fact that the charge-offs in the quarter of about 55% of the charge-offs were related to office loans, those loans we mentioned being the largest drivers. We actually had debt recoveries in consumer, which offset our overall charge-offs a little bit. So again, it's tough to draw those conclusions. I certainly don't have the in place that serves this coverage in LTVs on those two specific loans. Now, you know, what I can tell you from the CEO seat is that if they're on not a cruel, it means that there's a question as to whether or not the underlying cash flows can repay the loan as agreed. So...
Speaker Change: We might be able to get some of that offline with Emlen and Jason, but I can't give you the specifics on those two transactions. We were the lead lender. You're correct. It was, I think, a 2019 or 2018 origination significantly pre-merger. So, I can tell you that we were the agent on those two credits. And I think that's the information that I have available to me here, Lori.
Lori Hunsicker: Okay, okay, and then my follow-up question just switching gears. When in the quarter, did the security's restructuring occur and then finally, do you have a September bot margin?
Lori Hunsicker: Thanks for coming.
Speaker Change: I'll jump in with a September spot, Margin.
Speaker Change: You know, so the timber was a little bit lower, we were about 3.31%, loans came down 8 basis points in deposits, 2 basis points. I'll caveat that by saying monthly names a little bit more variable than quarterly names.
Speaker Change: I'll also say that September NEM really represents our repricing dynamics. So far started moving down well before the Fed cuts, and there was obviously some lag there with our deposits repricing later with the cut coming in the middle of the month. We also started holding higher levels of cash in September . So since mid-September, as I mentioned before, we've taken significant action on our deposit costs, that 25% beta already, and we are confident that our Q4 NEM will come in above our September spot number.
Speaker Change: Yes, I think that's it, and then the transaction there was kind of, it happened throughout the quarter, but probably waited average more to the middle of the quarter.
Speaker Change: Thank you, Lord.
Speaker Change: Your next question comes from the line of Samuel Vargas with UBS, your line is open.
Samuel Vargas: Hey, good morning. I just wanted to go back to the securities book and really comment it on the role on the yields being around 6% expected on the sort of the 5 billion of annual cash flows on that. Obviously this quarter is what's 5.84 so can you just comment on why this quarter was lower, why you expected to move higher over the next 12 months.
Speaker Change: Yeah, so on my comment at 6%, that was more a mix of loans and securities, so kind of full fix rate reprising. To your point, in this quarter, we added a billion dollars to 584. I think we're modeling 540 average for Q4, and our most recent purchase was kind of in between that 584 and 540. So, feeling good about our numbers there, but just to clarify that, that 6% or that plus 200 basis points was the reprising of our fixed securities and loans, so that's why the numbers were a little bit higher there.
Speaker Change: I take for the clarification on that and then the BIO of the positive base, you said the 60% data, just to clarify as well, is that on the new production for this quarter is that the overall book given the short duration of it that's already realized 60%.
Speaker Change: The 60% on the overall portfolio.
Speaker Change: Okay, and then so in terms of new production and have you been able to get to near 100% or potentially over 100%.
Speaker Change: Yeah, so I think before the cut, to where we're priced now, we're down 30 basis points of the cut and we're actively monitoring for potential additional moves. We've done, I think the team has done a really nice job of balancing the quidd versus earnings and we've been very prudent in our moves and you'll see more downward moves from us in the future. As we've seen, pretty good client reactions so far through the first cut that we've made.
Speaker Change: Yes, and a number of different, there's no real portfolio as one rate on the portfolio. So new dollars versus the existing portfolio all, it's not that there's diverse product pricing in there, so the way to think about it is one overall beta for the portfolio, which is existing deposits, plus new deposits are all getting originated. It's actually the same exact same yield to the beta on both new, and existing would be roughly the same.
Speaker Change: Thank you.
Speaker Change: Thank you so much.
Speaker Change: This concludes the question and answer session. I'll turn the call to John Ciulla for closing remarks.
John Ciulla: Thank you very much. We appreciate it all and joining today and you're continuing to interest in the company. Have a great day.