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spk01: Good morning and welcome to Webster Financial Corporation third quarter 2021 earnings call. Please note this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Kristen Manginelli, to introduce the call. Ms. Manginelli, please go ahead.
spk00: Thank you, Sherry. Good morning and welcome. Earlier this morning, we issued a press release to announce Webster Financial Corporation's third quarter 2021 earnings. On the call today, we will provide some brief comments regarding the company's third quarter earnings. Today's presentation slides have been posted on the company's investor relations website. Before we begin our remarks, I want to remind you that the comments made by management may include forward-looking statements within the meetings of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rule. 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. I'll now introduce Webster's Chairman and CEO, John Siula.
spk07: Thanks, Kristen. Good morning, and thank you for joining Webster's third quarter earnings call. CFO Glenn McGinnis and I are here in Waterbury, and we will review our performance for the quarter. I'll also provide an update on the status of our merger process with Sterling, and at the end of our presentation, Glenn and I will take your questions. Despite the continued impact of COVID, expectations for higher inflation and supply chain and labor challenges We see increased economic activity and strengthening confidence from our business and consumer clients with respect to demand for products and services. And we've seen improving loan activity, which coupled with anticipated higher interest rates should benefit the banking industry and Webster. Credit qualities remained remarkably strong for Webster and for the industry as a whole. With respect to our internal transformational project, we continue to make significant progress on the strategic revenue enhancements and operational efficiencies across the organization in order to achieve our fourth quarter 2021 cost savings target. Glenn will provide more detail in his remarks. Related to our merger with Sterling, our teams have been working diligently and collaboratively to prepare for our closing and remain on schedule for all integration design, planning, and execution activities. We are in a position to close the transaction shortly after we receive the final regulatory approvals on our application. In August, we received approval from our primary regulator, the OCC, and shareholders of both banks. While we have no certainty on the timing of the final approvals, hopefully we will receive them during the fourth quarter. Based on our communications with regulators and the fact that there are no outstanding information requests, we remain confident that an approval is forthcoming. With respect to the strategic rationale for the merger, I can say that through integration planning, our team is more excited about the deal and the opportunities that the combination will provide for our clients, colleagues, communities, and shareholders than we were during due diligence and at announcement. The two organizations are very complementary with virtually no customer or branch footprint overlap, and the strong commercial banking teams at both banks will benefit from a larger balance sheet and a more diversified combined loan book. We are creating a unique, commercially focused midsize bank with differentiated businesses and a diverse and growing funding profile. Interestingly, last week, both Sterling and Webster were among five banks nationally to be recognized by Coalition Greenwich as 2021 Greenwich CX leaders, financial services leaders that have excelled in customer satisfaction, customer loyalty, and creating an environment that is easy for the customer to do business. Specifically, each bank was recognized for customer experience in commercial middle market banking. I'll begin the financial report on slide two. Our financial metrics remain strong. We continue to execute on our fundamental banking activities, organically adding new customers and deepening existing relationships across all business lines and geographies. Excluding PPP, linked quarter loan balances grew by 11% annualized. Despite NIM compression, the strong loan growth enabled us to increase net interest income by 4% when compared to last quarter. Our adjusted earnings per share in Q3 were $1.08. Third quarter performance includes $5.8 million of net pre-tax charges related to the merger and our strategic initiatives. Tangible common equity grew by 7% and is $171 million higher than a year ago. Total revenue in Q3 was 6.5% higher than a year ago, while adjusted expenses decreased 2.7%. Our efficiency ratio improved to 55%, a decrease of more than 500 basis points from a year ago. Our third quarter adjusted return on common equity was 12%, and the adjusted return on tangible common was nearly 15%. Our $8 million provision was driven by strong loan growth and resulted in a reserve build of $7 million in the quarter. Credit quality remained solid, with key asset quality metrics continuing to be near cycle lows. As a percentage of the portfolio, NPLs, net charge-offs, and commercial classified loans were all better than a year ago. And our percentage of NPLs to total loans is at its lowest point since before the Great Recession. I'm now on slide three. Excluding PPP, total loans grew 3.3% from a year ago, led by commercial loan growth of $700 million, or 5%. This is a very strong quarter for commercial banking, with $1.2 billion of loan originations up solidly from a year ago, driven by growth in sponsor and specialty, commercial real estate, middle market, and business banking verticals. Loan fundings of $967 million were up 62%, or $372 million from a year ago. Consumer loans grew 3.8% or $252 million from second quarter and declined less than 1% compared to prior year. The linked quarter increase reflected stronger purchase mortgage and lower refinance activity during the quarter. Overall residential mortgage activities drove 82% of consumer loan originations flat to linked quarter and from a year ago. I'm now on slide four. Deposits grew 11.5% year over year driven across all business lines. Core deposits grew by $3.8 billion and represent 94% of total deposits compared to 90% a year ago, while CDs declined $686 million from a year ago. Deposit costs continue to decline and were six basis points in total in the quarter. Commercial banking deposits are up more than 23% from a year ago, primarily driven from municipalities and excess liquidity among clients across all lines of business and all geographies. Retail banking deposits grew 7.3% year-over-year with consumer and small business deposits growing 6.5% and 12.7% respectively. Retail deposit costs have continued to decline as well and totaled five basis points in the quarter. Turning to HSA banks, total deposits grew 5% year-over-year or 8% on a core basis excluding the TPA balances. Total footings grew 14% year-over-year. Slide five provides an overview of the transaction and integration timeline. As I discussed earlier, merger integration activities continue to be on track with the team from both banks working collaboratively and tirelessly to position us for success at close and beyond. We are prepared to successfully combine the two companies and begin operations shortly after we receive the necessary approvals. As shared in our merger announcement in April, Jack Kupnitsky and I both recognize that a critical element of success in bringing these two companies together is from a cultural perspective. As such, we've established a cultural integration framework that provides a clear and aligned view on the purpose and values of the organization and what we will expect from our colleagues in terms of guiding behaviors and performance. The new executive management team is working together to ensure that our combined culture reflects the strength that both banks bring to the combination. With that, I'll now turn it over to Glenn for the financial review.
spk03: Thanks, John, and good morning, everyone. We reported another quarter of solid results evidenced by strong loan growth, favorable credit performance, and continued execution on our merger and strategic initiatives. I'll begin with our average balance sheet on slide six. Average securities increased $76 million in the linked quarter. Securities represented 27% of total assets as of September 30th. During the quarter, we purchased approximately $1.1 billion in securities, up from $600 million in the prior quarter. Purchases had a weighted yield of 1.44% and a duration of five years. Securities called, matured, or paid down totaled around $500 million, with a yield of 2.23%. Our average cash balance held at the Fed totaled $2.3 billion, an increase of $1.1 billion linked quarter, driven by growth in commercial deposits. Average loans increased $125 million, or 0.6% linked quarter, primarily driven by an increase in C&I, commercial real estate, and residential mortgages, partially offset by PPP loan forgiveness. During the quarter, forgiveness on PPP loans totaled $448 million, and the remaining PPP loans were $398 million. In Q3, we recognized $16 million of PPP deferred fee accretion and the remaining deferred fees totaled $15 million. Excluding PPP, average loans grew $650 million, or 3.2%. Average commercial loans grew $427 million, or 3.1%, while residential mortgage loans increased $297 million, or 6.3%. Average deposits grew $1.1 billion, or 4% linked quarter. The increase was driven by continued growth in commercial transaction deposit products and was partially offset by a decline in higher-cost retail CDs. Average borrowings were flat to Q2 and down $1 billion from prior year as a result of excess liquidity. Borrowings represent 3.8% of total assets at September 30th compared to 7% a year ago. The loan-to-deposit ratio was 72% at September 30th. The common equity Tier 1 ratio increased 10 basis points linked quarter to 11.77%. The tangible common equity ratio decreased 20 basis points to 7.71% as a result of balance sheet growth, and tangible book value grew 2.2% linked quarter and 6.4% from prior year. Slide 7 highlights our GAAP performance and adjustment to reported income available to common. During the quarter, we recognized a net of $4.3 million after-tax charges related to our merger and strategic initiatives. On an adjusted basis, income available to common was $98 million, or $1.08 per share, resulting in a 12.2% return on average common equity and a 14.8% return on tangible common equity. On slide 8, we provide our reported to adjusted income statement. On an adjusted basis, net interest income increased by $9 million linked quarter, driven by loan growth and PPP fee accretion, which was partially offset by a lower yield on securities. NIM of 2.8% declined two basis points from prior quarter, primarily due to an increase in excess deposits held at the Fed, partially offset by higher PPP fee accretion. Excluding excess liquidity and PPP fees, third quarter NIM was approximately flat linked quarter. As compared to prior year, net interest income increased by $10 million. This was a result of higher PPP fee accretion, lower funding costs and loan growth, which was partially offset by lower yield in the securities portfolio. Non-interest income increased $11 million linked quarter, primarily driven by fair value adjustments of $6 million on direct investments and $3 million on customer derivatives, as well as higher loan-related fees of $3 million. This was partially offset by a decline of $2 million in HSA fee income due to lower exit fees on TPA accounts and a seasonal decline in interchange revenues. Compared to prior year, non-interest income grew $8.7 million. This reflects an increase of $9 million related to fair value adjustments on direct investments, $6.1 million from higher loan and deposit service fees, and $1.7 million increase in investment income. This was partially offset by declines of $5.6 million in mortgage banking revenue and $2.5 million in HSA fee income. The reduction in mortgage banking revenue was the result of holding more loans on the balance sheet as we deployed excess liquidity into fixed rate loans. The decline in HSA fee income was driven by 3.2 million in TPA closure fees recorded a year ago. Adjusted non-interest expense increased 5.6 million from prior quarter, reflective of a 4.3 million increase in performance-based compensation and a 1.4 million increase in technology expense. Versus prior year, non-interest expense declined 4.8 million due to our previously announced efficiency initiatives resulting in lower occupancy costs, compensation, and other expenses. Pre-provision net revenue was $139 million in Q3. This compares to $125 million in Q2 and $115 million in prior year. Our CECL provision in the quarter reflects an expense of $7.8 million. The adjusted tax rate was 23.8%, an increase of 15 basis points linked quarter. The net result is an adjusted net income of $98 million, or $1.08 per share, down from $1.21 per share in prior quarter. As you see on slide 9, we reported a $5 million linked quarter increase in core non-interest expense. This was primarily the result of performance-related compensation as evidenced by balance sheet and revenue growth and strong credit quality. We expect to complete the execution of our strategic initiatives by the end of the year and remain on track to deliver core expenses in the range of $164 million in Q4. Any variability would be related to performance-based compensation. The cost savings on this slide are reflective of our standalone initiatives. Over the last six months, we've made meaningful progress on our integration plans with Sterling and remain confident in our ability to deliver 11% of incremental cost synergies on a combined basis. Turning to slide 10, I'll review the results of our third quarter allowance for loan losses under CECL. In the quarter, we reported an $8 million provision expense and a $7 million increase in the allowance. The allowance coverage ratio, excluding PPP loans, remained flat at 1.49%, with total reserves of $315 million. As we look at the trend from Q2 to Q3, we established $6 million in reserves related to commercial and residential loan growth, and $2 million due to credit quality and macroeconomic trends. Slide 11 highlights our key asset quality metrics, reflecting strong credit quality performance trends. Non-performing loans in the upper left declined $20 million from Q2. Commercial, residential mortgage, and consumer each recorded linked quarter declines. NPLs as a percent of total loans are 47 basis points, down from 74 basis points a year ago. Net charge-offs in the upper right were $900,000 in the quarter, including $1.6 million in net charges for commercial, and $700,000 in net recoveries for consumer. Year-to-date, we have recorded $5 million in net charge-offs, which is on track for our lowest level since 2005. Commercial classified loans in the lower left increase $2 million from Q2 and represent 251 basis points of total commercial loans. Slide 12 highlights our strong capital levels. Regulatory capital ratios exceed well-capitalized levels by substantial amounts. Our common equity Tier 1 ratio of 11.77% exceeds well-capitalized by more than $1.2 billion. Likewise, Tier 1 risk-based capital of 12.39% exceeds well-capitalized levels by $1 billion. With respect to the fourth quarter, we expect average core loan growth, excluding PPP loans, to be in the range of 2% to 2.5%. Net interest income will decline $3 million linked quarter, primarily due to lower PPP income. Non-interest income will decline around $4 million linked quarter as a net result of non-recurring fair value marks on direct investment and customer derivatives. As indicated earlier, core expenses will be in the range of $164 million. Any variability would be related to performance-based compensation, and our tax rate will be similar to Q3 levels. With that, I'll turn it back over to John for closing remarks.
spk07: Thanks, Glenn. Webster's third quarter results demonstrate our continued focus on building long-term franchise value and maximizing economic profits through disciplined capital allocation process and strong execution in our differentiated businesses. Our colleagues remain committed to serving their clients while at the same time preparing for a successful integration. Webster continues and the new Webster will continue to deliver for its clients, communities, shareholders, and colleagues. Lastly, I want to say a big thank you to all of our colleagues for their commitment to our values and dedication to our customers and to each other. With that, Sherry, Glenn and I are prepared to take questions.
spk01: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the queue. You may press star 2 if you would like to remove your line from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Chris McGrady with KBW. Please proceed.
spk09: Hey, good morning.
spk07: Morning, Chris.
spk09: Hey, Glenn, maybe I'll start with you on the deployment and the quarter on the securities book. You've seen a lot of your peers be a little bit more aggressive in deploying cash. What are your thoughts into the merger in terms of redeploying more cash into the investment portfolio?
spk03: Sure. Good morning, Chris. In the quarter, we had an average balance at the Fed of about $2.2 billion, and we have begun to deploy some of that. So we're below $2 billion as we speak. And so I think you would expect, with a combination of both loan growth and securities deployment, that we'd probably end the quarter on average for a fourth quarter of about $1 billion.
spk09: Okay, billion cash. Great. And then maybe a question on capital. Once the deal closes, you guys have a lot of capital and you're generating a lot of capital. John, can you just talk about the buyback and the potential magnitude of a buyback?
spk07: Sure. I mean, I know when we put out the announcement of the transaction, we showed a $400 million stock repurchase to sort of plug excess capital there. We've talked about a $10.5 million. target CET1 ratio and then what I would say is what I always say which is you know we'd like to deploy capital in areas where we think we can generate and maximize economic profits first clearly this company will have a lot of excess cash pro forma for the capital for pro forma for the combination and we also generate a lot of capital each year so we'll then look at dividend and buybacks and you know certainly I think we have the capacity for significant stock repurchase, but again, if we find areas where we can accelerate loan growth, look at acquiring portfolios of commercial loans or deploying capital into our differentiated businesses, that's first choice, but will be appropriate in our allocation of capital deployment.
spk09: Okay, and I think you said last quarter you think the pro forma company can do double-digit loan growth. Sterling's results supported that last night. Any change to your view on prior comments?
spk07: You know, Chris, it's funny. I still think 8% to 10% growth is absolutely achievable. Could we outperform that? We're going to have a larger balance sheet. We'll have higher holds, but, you know, the market's still not back to normal in terms of loan demand, and we've seen fewer payoffs in the last couple quarters, so I think the prudent guidance sticks with, you know, approaching that double-digit loan growth, which we think as a combined company we can achieve.
spk09: Great. Thank you.
spk07: Thank you.
spk01: Our next question is from Matthew Breeze with Stevens. Please proceed.
spk11: Good morning. Hey, Matt. Just on expenses, obviously the Delta was driven by performance-based comp, and it sounds like that could happen, at least that's on the table again for the fourth quarter. So could you just outline for us what performance-based comp was this quarter, and is that a good range to consider for the fourth quarter?
spk03: Yeah, so I think there was a bit of a true-up, Matt, to Glenn, in the third quarter based on our performance. So it spiked up in the third quarter. At anything, I would expect it to be... somewhere between a million and a million and a half in the fourth quarter at most. Okay. So I wouldn't pull it forward or push it forward.
spk11: Okay. And then maybe you could just talk about the health, the strength of the pipeline. Obviously, you're very optimistic on long-term loan growth, but how do you feel about it over the next three to six months?
spk07: Yeah, Matt, you know, I'm getting more bullish. I think we talked last time around the fact that before you saw sort of back to normal loan demand, a lot of these companies and individuals needed to kind of deploy their excess liquidity. And then obviously with some uncertainty and you see, you know, supply chain issues and labor issues, maybe people a little reticent to invest. But obviously we saw a good Third quarter following a pretty good second quarter for us, and our pipeline going into the fourth quarter is one of the strongest it's been in the last several years, and that's across all of our business lines. Utilization, we still haven't seen a significant tick up there, so that could be a tailwind. if in fact we start to see people on the asset conversion cycle in businesses like ABL start to pick up a little bit. So I'm getting more bullish, and we are seeing a lot of pent-up activity. But again, I still think there's a lot of liquidity out there, and we haven't seen line utilizations tick up. So I'm still thinking we're kind of going to be cranking as we get into the second and third quarter next year.
spk11: Got it. And then just to follow up on the last question, the near double-digit loan growth on a combined basis. In this market from Boston to New York, these are traditionally slower growth markets. It's going to be a much bigger balance sheet. Could you just walk us through maybe some of the areas that might need to change on a combined basis in order for you to get there, or maybe it's nothing at all? I mean, are you considering bringing some business lines national or adding new business lines? Could you just give us a sense? Historically, banks that big, it's just tough for them to get that kind of loan growth. How do you intend to get there?
spk07: Sure. I think our current assumptions of 8% to 10% really are BAU. So we're likely to continue in all specialized national and local businesses out of the gate. And so we've done a lot of discussions. We've done a lot of diligence. We like all the businesses. It gives us a lot of levers. It gives us diversity across geographies. It gives us some national franchises. And so I don't think that we will make any significant adjustments to the lines of businesses that we're focused on or the geographies we're in over the short term. But then, and you know Jack and you know us, I think we'll obviously look at each of our businesses as we move forward and as we get bigger and think, where are the risk-return dynamics? Can we generate significant economic profits in that business? Can we maintain our competitive position maybe in some of the smaller niche businesses? But the short answer to your question is, how do we look at 8% to 10% loan growth next year? It's really executing on all the business lines that the combined bank will have currently, and I think there are opportunities for us to go deeper in some businesses and accelerate that trajectory, but that's not included in our strategic plan right now.
spk11: Great. I'll leave it there. Thanks for taking my questions.
spk07: Thank you.
spk01: Our next question is from Brock Vanderbly with the UBS. Please proceed.
spk02: Thank you. Good morning. Hey, Brock. Hey. Just zeroing in on a couple aspects of loan growth. I think you covered the sponsored specialty and CNI. What are you thinking in terms of residential, especially in the Q4 timeframe, the seasonal slowdown, and also you noted some strength in CRE. Maybe you could talk about those two areas.
spk07: Yeah. Our commercial real estate actually had one of its biggest origination and funding quarters in quite some time, so there's obviously activity there. But again, we always talk about the dynamic of originations and paydowns, and we had fewer paydowns in commercial real estate in the quarter, and that benefited the net growth You'll see most of our growth continue to come in the commercial categories, Brock, but we have had a couple of strong quarters in residential mortgage just given the dynamics of interest rates and kind of activity in the marketplace and where people are moving. Connecticut's been the beneficiary of a lot of influx, which is where we have most of our residential loan exposure, so that's helped. We do think that'll slow a little bit just given the seasonality fourth quarter and winter. That never really moves the needle ultimately for our significant loan growth much. I would say you can anticipate our residential originations and fundings to be slightly lower than the prior quarter. We expect the commercial pipelines, which are robust, to continue to convert into funded loans in the fourth quarter.
spk02: And Glenn, you touched on this in your prepared remarks, but if you could just kind of review and connect the cord for us between the operating expense we saw at Q3 and your goal for Q4 and kind of how we get from here to there.
spk03: Yeah, so I did kind of hit on it, and I think one of the bigger drivers was this performance-based compensation. And so that was the largest driver that will drop that number. There are other things that are sort of more seasonal, whether it's, you know, marketing, you know, timing of mailing campaigns and things like that. But, again, when I pull it all together, we still feel comfortable or feel, you know, that we'll hit that 164, around 164 million. And, like I said, subject to any variability on performance-based comp. That 164 excludes, like, amortization and things like that, just so you know it's efficiency-based.
spk02: Got it. Got it. Okay. Thank you. Thanks, Brock.
spk01: Our next question is from David Cherovini with Wedbush. Please proceed.
spk08: Hi. Thanks. A couple questions for you. Starting with on loans, you spoke about the growth, but I wanted to touch on the loan pricing. And on slide three, I see how the yield increased significantly. you know, to 3.6% in the third quarter. I'm assuming PPP was a key driver of that. But can you talk about the loan pricing environment?
spk07: Sure. Sure, David. It's good to hear from you. Yeah, the 14 basis point quarter over quarter increase in yield wasn't really on kind of the pricing. It was on acceleration. The biggest drivers were acceleration of deferred fees on PPP and other loans prepaying. So I'll give you a sense. In the quarter... From an origination standpoint, our yields actually held up pretty well in terms of prior quarter, which is a good sign. So we're not seeing a lot of degradation in price. And they range from anywhere from kind of the mid-2s yields for high-quality commercial real estate to approaching 5% on the good sponsor and specialty deals, around 4% on business banking and middle market kind of somewhere in that 2.5 range to 3%. So, you know, depending on the mix, those are the coupons on our originations, and we didn't see much degradation over the last several quarters, which in a competitive market was a plus for us.
spk03: Yeah, just if I can just add a little. So if you look at the third quarter versus the second quarter, Dave, I mean, the yield is basically flat. If you adjust out for PPP, I think in the second quarter, the yield on the total book was 340, and the third quarter was like 338. So it was basically flat.
spk08: Got it. Thanks for that. And then shifting to HSA, can you talk about the pipeline there as we head into the open enrollment period?
spk07: Yeah, sure. We've had a good year in selling activity. And as we've talked about, you know, our growth has been around market, particularly in the direct-to-employer channels. Our partners, health care partners, have grown a little bit less quickly and Our pipeline this year is good. Obviously, a lot of what we, everything that's going to really matter for enrollment period, most of that is kind of in process, and we think it looks fairly encouraging right now. I'd say that, obviously, you know, this quarter is kind of slow as we approach the enrollment period. The wild card in the last couple years and through the pandemic with the whole industry has been less new customer acquisition and more the amount of accounts signed up with your large employers, and with changing employment dynamics, you know, less hiring, more disruption, that slowed a bit. You know, we always talk about 75% to 80% of our new accounts every year actually come from our existing customers, and that kind of waned a little bit last year. So what I would say is we're hoping, with a changing employment market to the positive, that with a good selling season for us and onboarding of new customers, better retention, and a more normalized new account opening from existing customers, we should see a pretty robust enrollment period. So we're enthusiastic right now, and obviously I'm reticent to give you any numbers because we don't really have a line of sight, and we'll start talking about it in the fourth quarter when we start to see enrollment.
spk08: Great to hear. Thanks very much.
spk01: Thank you. Our next question is from Steven Duong with RBC Capital Markets. Please proceed.
spk04: Hey, good morning, guys. Good morning. Hey, Glenn. You know, we've spoken about your deposit beta. Can you share with everyone just overall, you know, on slide 22, your rate sensitivity analysis? What goes into the deposit data for the first, say, 50 basis points and discures in the subsequent 50 basis points as well?
spk03: Yeah, thanks, Steven. Good question. And I'll refer to back to page 22 where you see our short end up of 50 basis points indicates as a sensitivity of 6.2% on PPNR. It is the factor that we have lowered our deposit data. It was as high as 32. We did lower it to, you know, say between 25 and 30. But the fact of the matter is, even in a rising rate environment, we're assuming a lag. So the first 25 basis points, we think the data will be closer to 11. And in fact, the second 25 basis points, 11 as well. It's not until like that third lift that we start to see that, at least from a modeling standpoint, the data has come back in. And at that point, we'd say, 20%, and then by the first 100 basis points, we'd probably be closer to what we now say is our full beta of, say, 29%. So there is a lag in there. That is built into this, what you see back on page 22. And it's a wild card. I mean, there is a school of thought that says it's going to be closer to zero for the first two moves. So anything like that would be additive to our asset sensitivities.
spk04: Yeah, yeah. No, I think that's something we're all trying to wrestle with, that we've never been here before. And given the amount of liquidity in the system, it just doesn't seem that everyone's going to be chasing after deposits. I appreciate that. And then I guess, John, just on the merger, Do you get a sense that the Fed is just backed up or is it something more overall where the regulators kind of want to slow the process down a little bit?
spk07: We think it's backed up. And as I said earlier... You know, we don't have clear line of sight to timing. We've had really good discussions and dialogue with all the various regulators. So, you know, what we can say, you know, we announced the deal in April. If you look at historic timelines on mergers, we're still kind of well in a comfortable zone. So we don't think that there's anything sort of behind the scenes that could derail this transaction. And so the only thing I want to say is, you know, we've answered all the questions. We really like our application. the merits of the transaction itself, and so we think it's just timing.
spk04: I appreciate it. Thank you.
spk01: Our next question is from Laurie Hunsker with Compass Plate. Please proceed.
spk05: Hi, thanks. Good morning. Hey, Laurie. I just wondered if you could comment on the dump in your leverage SNS and just how we should think about that. you know, up almost $200 million late quarter. Where are your plans to grow that? Is that where the loan growth is going to come in terms of your projection?
spk07: Yeah, you know, I think, you know, Lori, I think we've demonstrated over time a really disciplined approach in terms of making sure that our enterprise-reliant lending, whether it's regulatorily leveraged or not, the activities in that book remain within the appropriate level given the entire loan book. That's one of the reasons why we think that this transaction will be so terrific is because it does give us some more running room from a risk management framework and a concentration framework to continue to grow sponsor and specialty. What's interesting is that business has high originations. It's very profitable, as you know, and we think we're kind of the best in the business at it. But it also has a relatively low and short average life. So a lot of times you see good originations and a lot of payoffs. So again, I don't think you will see disproportionate outsized growth over the long term. And I think once we close the merger, our concentration there is about half of what it was. We'll be able to accelerate growth there to the point we can. We are certainly not in a position right now where us The regulators, our risk infrastructure, our risk committee is concerned with respect to overall exposure.
spk05: Okay. And so, sorry, just to follow up. So, right, so your billion four of your three six books may be asked a different way. What percentage would you like the leverage piece of that to be when you think about growth going forward? Is it going to stay around the same 60-40, or how do you think about that?
spk07: Yeah, I think I'm not sure we look at it that way. I think we look at our overall risk rating. You know, there are some leveraged deals that are actually very highly risk-rated, and they fit regulatory definitions. So I think as a percentage of Tier 1 capital and reserves, we kind of look at our sponsor and specialty overall enterprise book, and, you know, we're kind of comfortable with whatever it is right now, $3.6 billion on reserves. $20 billion loan portfolio. We still think we have some running room. So if you look forward to a $40 billion loan portfolio, we've got significant running room. And I think, you know, we've been prudent risk managers throughout and will continue to be.
spk05: Okay, great. Helpful. Thanks. Can you just clarify the gain that you booked on the strategic initiatives of $4 million? What exactly was that?
spk03: Yeah, so Lori, it's Glenn. That was a reversal of an estimate we made on severance liabilities, and it was sort of driven by two things. One is that we had a higher retention rate on some of our employees, and the second was that there are initiatives that are tied to things like the core banking platform and loan systems. So given the MOE, we sort of paused on some of those until we make those final decisions. So that's really what's driving the $4 million.
spk05: Got it. And then how should we think about that line going forward? Obviously, you've got the mergers broken down separately. How should we think about that line going forward?
spk03: That line being?
spk05: Just the strategic initiative line. So last quarter was $1.1 million. You've got your branches already closed as of?
spk03: I don't think you should. You shouldn't. Yeah, I'm sorry. After the fourth quarter, once we achieve our, you know, as we indicated, we'll achieve the 164 and efficiency-based expenses, you shouldn't expect to see anything. I mean, you know, that trails right off. We, you know, everything else will be related. Right.
spk05: That makes sense. Okay. This last question, if you can help a little bit on margins. So I'm looking at margins. XPPP looks like it was 265 in June, now 260 in September. If we fast forward maybe two quarters so the PPP for the most part is gone and then Sterling is rolled in, how should we be thinking about your pro forma margin? Any help that you can give us there?
spk03: Yeah, let me give you some color on what we see from Q3 to Q4 first, because you're right, the PPP does run off, but it's sort of offset by the deployment of some of our excess cash as well. So if you think about it, going into the Q4, you'll have, say, seven basis points less as a result of PPP coming down. And then you'll have some compression on the securities portfolio, and that'll be offset by the deployment, primarily offset by the deployment of cash. And as well as, you know, I think we have a little bit more room on deposits. You would expect to see our deposit costs down closer to five basis points in the fourth quarter. You know, that you would expect all things considered, and I sort of gave the guidance on net interest income, you know, down $3 million. It sort of backs into like a three basis point compression into the fourth quarter on NIM. And then as you get into the first quarter, you obviously don't have the benefit of PPP, so you lose that, but you more than offset that on the deployment of excess cash, which it should bode well for. or core, meaning core XPPP net interest margin.
spk05: Okay, I'm sorry, just one last question as we think about margin. Do you have an accretion number yet in terms of what you're thinking about for net interest? Okay, okay.
spk03: Yeah, no, we haven't made the marks yet, and it sort of went back and forth. I mean, I think we're closer to where we were when we announced the transaction in April today, given where the tenure is at 163. And so, you know, there was a bit of a dip in rates during the second quarter, but I think we're sort of back very close to where we were when we made the announcement. But all that has to be trued up.
spk01: Right. Thank you.
spk03: Thanks, Lori.
spk01: Our next question is from Jared Shaw with Wells Fargo Securities. Please proceed.
spk10: Hey, everybody. Good morning. Hey, Jared. I guess sticking with the loan or going back to the loan growth side, great trends there in a market, I guess, that really isn't seeing overall growth yet. I mean, are you taking market share? And if so, where are you seeing the most success in terms of bringing new customers on, especially with utilization rates staying flat?
spk07: Yeah, it's interesting. And I've said this a number of times, Jared, that particularly in this market, there are Hasn't been as much trading of traditional, like middle market, you know, we're taking from peoples or citizens or they're taking from us, because a lot of banks, including Webster, and I'm sure Sterling as well, have done a really good job of hugging their customers. We're seeing a lot of taking advantage, and I think this is, and I've described this to the market before, one of the advantages of our commercial real estate and our sponsor and specialty business is taking advantage of economic growth and activity with sponsors, and I use that word sponsors to capture commercial real estate investors, private equity sponsors, family offices who are engaged in capital markets activities, acquisitions, mergers, trading of property. So when I look at this quarter, for example, We're doing a good job in business banking of winning more than our fair share. And I think we've got a strong business banking franchise from Boston to Westchester County. So I think that's where our folks are fighting really well on the ground with good products, turning credits around quickly. And so I think that's kind of where we might be gaining share through growth. I think on sponsoring specialty and commercial real estate, it's the depth and duration of the relationships that we have with our sponsors and and our commercial real estate investors where we've demonstrated surety of execution over a long period of time, and those transactions are less competitive. Not saying we're the only one, but we're the first call or we're the second call, and then we can kind of win that business. And oftentimes it's a new acquisition or a repositioning acquisition of a piece of property rather than saying we're going up against an incumbent bank. We're going up against other banks and non-banks to provide financing based on go-forward economic activity. So I don't think we're gaining significant middle market share in traditional multi-generational middle market companies. I think we're gaining more disproportionate share in the economic activity that's coming back after the pandemic through transactions.
spk10: Okay, thanks. That's a great color. I guess shifting a little bit to the credit side, You know, credit's very strong. I guess I was surprised to see the allowance ratio stay flat. Can you give some color over how you're looking at the progression back to a day one, more of a day one level, and how we should be thinking about that, I guess, in light of also, you know, when the deal closes, you'll have an additional supplemental credit coverage from the provision in the credit market?
spk07: As Glenn noted, almost the entire provision was related to robust growth on the balance sheet in terms of loans and mix. We're obviously very disciplined in the CECL process. We rely on our models. While still positive going forward, not significant change in the forward outlook. You've got labor challenges and supply chain disruption as well. you know, we're sort of status quo, but adding for significant balance sheet growth. And I think what you'll see over time is as the economy continues to grow and as we continue to maintain strong asset quality, there's an opportunity for us, and that model will show us that the 149 may be able to come down a bit. So, you know, I know a lot of people think strategically about their CECL model, but we kind of stick to the the regimen of the process. As we said, there's nothing in the portfolio that's giving us concern, but we'll continue to make sure that we're providing for life of loan projected losses over our loan growth.
spk10: Okay, thanks. And then just finally for me, maybe Glenn, you can just comment on the LIBOR transition, how that's going. And then we've seen some data that shows that potentially the SOFR spreads are a little bit better. Are you seeing that at all, or is it still under LIBOR?
spk03: First of all, we're well positioned from a LIBOR standpoint. I think we actually have a transaction coming up that will be SOFR-based. The spread between SOFR and LIBOR, for the most part, I would think that the market's probably going to price based on that. I think That remains to be seen, but I would be surprised if everyone prices down to SOFR without some kind of spread on top of it. So we haven't seen enough in the market yet to determine that, but that's kind of what we're thinking right now. Great. Thanks a lot. Thank you.
spk01: And our final question is from Ken Zerb with Morgan Stanley. Please proceed.
spk06: All right. Great. Thanks. Sorry, just if we can go back to expenses, I just want to make sure that we're thinking about the 164, right? And I do recognize that if the merger closes, we may not actually see the 164, but it feels like there just might be a little misunderstanding here. So the 164 doesn't include amortization, so that would make it higher. And then are you excluding all performance-based comp from the 164 such that we should add? All right, go ahead, please.
spk03: Ken, if you look on slide 9, the reason we call it efficiency-based, ratio-based, is that we've excluded amortization even from the time we set the target. So that million has always been moved out. My comments were that we feel confident in the 164, but with the understanding that if we were up, say, a million or a million and a half, it would all be performance-based compensation. That's how we feel right now, and that's not to say that we see that right now, but if we continue to have the trends that we've had, whether it's 3.2% loan growth, favorable credit quality, and things like that, you might expect to see some of that. But generally, I think we'll be in that range of 164.
spk07: Yeah, Ken, when we set the targets and the goals, we're setting performance at plan, in terms of revenue performance, and in the last couple of months and quarters, we've actually significantly outperformed. So, obviously, Glenn trues up the accrual, and you've actually seen that across a lot of banks this quarter. And to the extent we significantly outperformed plan in the fourth quarter, and there needs to be more accruals, which we're not saying there is right now, but that there could be based on some of the pipeline and trajectory, that could be the delta.
spk06: God, it would be on top of the 164. If fees and other things were positive. Okay, I got it. Yeah, understood. Okay, and then just the other question, just going back to the reserve, obviously you are one of the only banks that sort of built or kept your reserve relatively flat this quarter. I mean, do you feel that you're at a good, sort of a good place for your reserve, sort of on a Webster standalone basis, at least for the near term? But I guess more importantly also, Like, post the Sterling deal, what is the right ACL target, if you want to call it a day one level, that we should be thinking about?
spk03: I think, look, at 140, at 149, I think we feel, obviously we feel comfortable with it. That's why we posted it. It's our outlook on loan growth. You know, and I think Sterling is very similar to us, as a matter of fact, as far as the coverage ratio anyway. Okay. It's going to be driven by a portfolio mix and an economic outlook. So our growth, our provision for the quarter was primarily driven by loan growth. And so that's really what drove it. I think if you look on the slide, we took a little on for lower GDP forecast in 2021 and 2022. But the bulk of our provision for the quarter was driven by loan growth.
spk07: Ken, I've always been careful, right, being a former credit officer. You know, the reserve is what the reserve is as you look through your risk rating, you know, your probability defaults and your loss given defaults, and then obviously you've got your macroeconomic factors. And so we're at the right level right now. Do, from a management perspective, when I look qualitatively at the portfolio, is there room for that to come down on a combined basis as well when concentrations across a larger portfolio will go down? Sure, there is. And I think if you continue to see economic growth and the macro factors continue to improve and you continue to see good credit quality and good credit management for us and for Webster 2.0, that number can certainly come down. And I'd also remind people, you know, we feel very good about our credit performance. If you look back now, particularly in commercial banking, going back 15 years, I think we've been able to out-deliver and out-perform. But, you know, our sponsor and specialty business does carry with it, by definition, because it's enterprise-reliant, higher loss-given defaults. Now, they haven't emerged in our execution over time, so when the mix is more sponsor and specialty, you also see us have a more robust provision. So that's kind of the way to describe it, but we're at the right level right now. Continued execution and macro environment improvement, that number can come down.
spk06: Yeah, I guess that's what I was asking. What is that future number? What could that future number be in a better environment? Other banks would refer to it as sort of their Cecil Day One number, but But if you don't want to comment, I understand. I just thought I'd throw it out there.
spk07: Yeah, I don't think I can intelligently accept to say, I think, you know, you're right, there is some credence to looking at that legal day one if you believe that that's the right macro environment and the size of the portfolio, and then up or down depending on the mix of originations and what the combined bank at a $40 billion balance sheet, which will probably lower correlated risks and concentrations, could provide some relief. I just don't want to speculate on it right now.
spk06: All right. Thank you very much.
spk01: Thank you. We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.
spk07: Terrific. I want to thank everyone for your continued interest in Webster. Have a great day.
spk01: Thank you. This does conclude today's conference. You may disconnect your lines, and thank you for your participation.
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