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spk08: Reformation Reform Act of 1995 and are subject to the Safe Harbor rules. Please review the forward-looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. The presentation and accompanying management remarks can be found on the company's investor relations website at investors.websterbank.com. I'll now turn it over to Webster Financial CEO, John Ciullo.
spk11: Thanks, Emlyn. Good morning and welcome to Webster Financial Corporation's third quarter 2023 earnings call. We appreciate you joining us. I'll provide remarks on our high-level results and operations before turning it over to Glenn to cover our financial results in greater detail. The results we announced today further illustrate the power of Webster in terms of earnings potential, as well as our sound operating and risk profile. We continued to enhance our liquidity position, and in contrast to broader industry trends, we grew deposits by $1.6 billion. We also grew our net interest income and materially expanded net interest margin in the quarter. In the quarter, we also completed our core systems conversion, marking a significant milestone in our integration, and we are pleased with the outcome and did so with limited client disruption. Our streamlined technology architecture will allow us to further enhance client experience and more efficiently deliver for our clients in the future. Achieving this outcome took an exceptional effort on the part of our colleagues, particularly our client-facing colleagues and those dedicated to the conversion. I want to express the gratitude of our executive team, directors, and shareholders for their efforts. With the core conversion complete, we expect our company's financial potential will become even more evident over the near to medium term. and we will have significantly more opportunity to build upon our operating capabilities going forward, including services that allow us to enhance non-interest income in our commercial, consumer, and HSA businesses. Furthermore, our colleagues will direct their full attention to continuing to grow the organization as they deepen existing and develop new client relationships, enhance our product capabilities and client service, raise Webster's market profile, and keep operations running smoothly. With that as an introduction, I'll get into our financial highlights for the quarter. I'll start on slide two. On an adjusted basis, we generated EPS of $1.55, with solid results across nearly all of our income statement lines, and PPNR grew 2% from the prior quarter. This generated an adjusted return on assets of nearly 1.5%, and an adjusted return on tangible common equity of 21%. our efficiency ratio remained at 42% among the best in the industry. We grew our deposits by almost 3% over prior quarter, and we were able to grow net interest income despite a decline in loans. As we have discussed in our prior calls and at our investor day in March, we've continued to evaluate our capital allocation and the risk-return dynamics across lending businesses since our merger closed nearly two years ago. We've discussed with many of you that the time would come to de-emphasize some businesses where our resources and capital could be better allocated, and we are starting to see some of that today, particularly in an environment where liquidity is at a premium and the credit environment remains uncertain. In the quarter, we focused our loan origination efforts on franchise building, full relationships, C&I, and non-office commercial real estate. We purposefully de-emphasized our mortgage warehouse activities where balances materially declined. As a result of our deposit growth and more targeted loan origination activities, Our loan-to-deposit ratio improved to 83%, providing us a ton of flexibility as we move forward. We have a solid loan pipeline and feel good about our ability to continue to safely grow earning assets, even with a backdrop of sluggish loan demand. Our common equity Tier 1 ratio and TCE ratio are strong at 11.2% and 7.2%, respectively. Our robust capital position and returns provide us a great deal of flexibility and optionality, in terms of capital deployment, whether it be organic growth, share repurchases, payment on a common dividend, or in selective instances, executing on complementary acquisitions such as the Interlink and Venn transactions that we've executed on over the last two years. On slide three, we again provide a profile of our diverse and unique deposit funding. Many of you have seen this slide a few times now, but we'd like to highlight what we believe to be one of our key competitive advantages. particularly as deposits exit the banking system. The deposit growth we generated this quarter was a team effort with most of these channels contributing, and Glenn will provide more details on our deposit growth shortly. This business profile also enables our robust liquidity position, which we review on the following slide, slide four. We again increased our immediately available liquidity to $19.8 billion from $18 billion last quarter. In the most recent quarter, our uninsured deposits fell to 22% of total from 25% last quarter, and our liquidity coverage of those uninsured deposits grew to 148% versus 124% last quarter. I'll touch on our office CREE portfolio and credit in general as we turn to slide five. Office loan exposure continues to be a focus of our conversations with investors and we continue to actively manage our risk in that asset class. Notably, we've proactively reduced our office exposure, which is now under 1.2 billion, or 2.3% of loans. Including actions taken this quarter, we've reduced the portfolio by $500 million since the second quarter of 2022, or 30% of the original balance. The portfolio is generally well secured, with an at origination weighted average LTV of 54% and a current debt service coverage ratio of 1.9 times. No delinquencies in the portfolio and a low level of non-accruing assets. Note that of the remaining portfolio, almost two-thirds of our exposure has some level of tertiary support in the form of a guarantee or reserve. Overall, while it's clear that the credit environment remains uncertain and that the industry trends indicate some level of bumpiness as we move forward, We remain generally pleased with the resilience and credit metrics in our existing loan portfolio. While our commercial classifieds increased in the quarter, they remain well below pre-pandemic levels. Our non-performing loans and charge-offs remain stable and at historically favorable levels. We continue to add to our overall allowance for credit losses, and our 1.27% coverage of loans and leases compares favorably to peers. We continue to proactively manage credit exposure in our portfolio to ensure early identification of problem credits. I'll now turn it over to Glenn to provide more details on the quarter.
spk09: Thanks, John, and good morning, everyone. I'll start on slide six with our GAAP and adjusted earnings. We reported GAAP net income to common shareholders of $222 million with earnings per share of $1.28. On an adjusted basis, we reported net income to common shareholders of $267 million an EPS of $1.55, excluding $62 million in pre-tax merger-related expense. Merger-related charges were associated with our core conversion, which was completed in the third quarter and will decline significantly in the fourth quarter. Next, I will review our balance sheet trends, beginning on slide seven. Total assets were $73 billion at period end, down $900 million from the second quarter. Interest-bearing deposits, primarily cash held at the Fed, was $1.8 billion at period end. We averaged $1.2 billion in cash for the quarter, in line with what we anticipate going forward. Our security balances were relatively flat in the quarter as we reinvested proceeds for maturities and sales. Loans were down $1.5 billion, reflective of both lower loan demand and a decline in non-strategic loan categories. Deposits grew $1.6 billion in the quarter, and we reduced borrowings by $2.6 billion. Deposit growth was across several product types and business lines, including over $250 million in non-interest-bearing deposit growth. Our loan-to-deposit ratio was 83% in the quarter, down from 88% last quarter, and we anticipate operating in the mid-80s going forward. Our capital levels are consistently strong. The common equity Tier 1 ratio was 11.2%, and our tangible common equity ratio was 7.2%. Tangible book value decreased to $29.48 per share, reflecting the impact of AOCI, the dividend, a small share repurchase. This was partially offset by retained earnings. Unrealized security losses included in tangible book value increased to $819 million after tax from $645 million last quarter, driven by higher rates. In a steady interest rate environment, we anticipate roughly $125 million of this or to creep back into capital annually. Loan trends are highlighted on slide 8. In total, loans were down by $1.5 billion, or 3% on a linked quarter basis. The commercial bank continues to drive loan trends, where declines were reflective of both lower demand and declines in non-strategic categories. Mortgage warehouse was down $600 million. Commercial real estate was down $100 million as we continued to reduce our office exposure, and C&I was lower by $900 million. The yield on the loan portfolio increased 14 basis points, and floating and periodic loans were 59% of total loans at quarter end. We provide additional detail on deposits on slide 9, with total deposits up $1.6 billion from prior quarter, or 2.7%. We saw growth in all major deposit categories, with the exception of savings. Growth was aided by the seasonal inflow in public funds, along with growth in interlink, commercial, and HSA. In our commercial business, we continue to recapture balances that have left in search of diversity earlier this year, as well as new clients. Our total deposit costs were up 24 basis points to 196 basis points for cumulative cycle-to-date total deposit data of 37%. On slide 10, we have updated the forward progression of our deposit data assumptions. We anticipate our cycle-to-date data will reach 40% in the fourth quarter of this year. While the macro data has pushed out the interest rate cycle, we would still anticipate a beta in the low to mid-40s by the middle of 2024. Our expectations here align with our outlook, for which we assume no further Fed increases at this point, with cuts beginning at the back half of 2024. Moving to slide 11, we highlight our reported to adjusted income statement compared to our adjusted earnings for the prior period. Overall, adjusted net income was up $7 million over prior quarter. Net interest income was up $3.3 million as we continued to benefit from our asset-sensitive balance sheet. Adjusted non-interest income was flat, while expenses were down $2.3 million. We also benefited from a lower tax rate, 20.1% this quarter, down from 21.7% in the second quarter. Partially offsetting these trends, the provision was up $5 million. The net interest margin was 3.49%. up 14 basis points from the prior quarter. The NIM benefited from more normalized on-balance sheet liquidity, as well as our asset sensitive position. And our efficiency ratio was 42%. On slide 12, we highlight net interest income, which grew 3.3 million linked quarter. Net interest margin increased 14 basis points from the prior quarter. Our yield on earning assets increased 17 basis points from the prior quarter. and the pace of deposit pricing moderated to 24 basis points. It's important to note that our total cost of funds were up just four basis points, as growth in core deposit categories was used to replace wholesale funding and brokered CDs. On slide 13, we highlight our non-interest income, which was flat the prior quarter. An increase in derivative valuation and direct investment gains was offset by declines in deposit service fees. Transaction activity tied to commercial clients remained slow in the third quarter, though the outlook is improving into next year. The year-over-year decrease was primarily driven by $10 million in lower client deposit fees, $7 million lower loan-related fees, $4 million from the outsourcing of the consumer investment service platform, and lower client hedging activity. Non-interest expenses on slide 14. We reported adjusted expenses of $301 million down 2 million from the prior quarter. Reductions in professional fees, occupancy, and marketing were partially offset by higher employee benefits and technology expense. Slide 15 details components of our allowance for credit losses, which were up 6 million over prior quarter. After recording 29 million in net charge-offs, we incurred a 36 million provision expense for macro and credit factors, partially offset by the impact of lower loan balances. As a result, our allowance coverage to loans increased to 127 basis points from 122 basis points last quarter. Slide 16 highlights our key asset quality metrics. On the upper left, non-performing assets are flat to prior quarter and prior year, with non-performing loans representing just 43 basis points of loans. Commercial classified loans is a percent of commercial loans increased to 174 basis points from 139 basis points as classified loans increased by 118 million on an absolute basis. The balance was up as we saw migration of a few larger credits that we expect to cure over time. Net charge-offs in the upper right totaled 29 million or 23 basis points of average loans on an annualized basis. We divested another 78 million in office loans in the quarter. These divestitures generated 13 million of the 29 million in net charge-offs. Worth repeating, our total office exposure declined $110 million, inclusive of other actions, this quarter. On slide 17, we maintained strong capital levels. All capital levels remain in excess of regulatory and internal targets. Our common equity Tier 1 ratio was 11.2%, and our tangible common equity ratio was 7.2%. Our tangible book value was $29.48 a share. Including the AFS mark on our securities portfolio, our common equity Tier 1 ratio would be approximately 9.5% as of September 30th. I'll wrap up my comments on slide 18 with our fourth quarter outlook. We expect loans to grow in the range of 1% to 2% with growth-focused and strategic segments. We expect core deposits to be in the range of third quarter with a year-end loan-to-deposit ratio in the mid-80s. We expect net interest income of $580 million to $590 million on a non-FTE basis and excluding accretion. Approximately $4 million in accretion would be added to the interest income outlook. And for those modeling net interest income on an FTE basis, I would add roughly $17 million to the outlook. Our net interest income outlook assumes no further Fed increases. We currently expect NIM to be flat to the third quarter. Non-interest income should be approximately $90 million. Core expenses are expected to be around $305 million with an efficiency ratio in the range of 42%. Our expense outlook excludes the FDIC special assessment. We expect an effective tax rate of 21%. We'll continue to be prudent managers of capital and target a common equity tier one ratio of 10.5%. With that, I'll turn it back to John for closing remarks.
spk11: Thanks a lot, Glenn. As I wrap up my remarks, I want to hit on the implications of the proposed regulatory changes for banks in excess of $100 billion in assets, as it's among the topics we're most frequently asked about. We anticipate it will be several years before we reach the asset threshold at which the proposed regulations would impact Webster. During that time, both the application of the regulations and the operating environment may significantly change. As you would expect, we've already begun to build the necessary capabilities, talent, and investment to tackle the enhanced risk framework requirements that may apply to us as we approach $100 billion, just as we have tackled the OCC's heightened standards requirements that came with crossing the $50 billion threshold. While there will likely be increased financial burdens, such as required debt issuance and compliance costs, there could be several paths to absorbing and overcoming these challenges, including our increased scale and earnings power. In the near term, we believe our size brings a unique mix of scale and agility relative to many of our regional bank peers. We'll utilize our strong operating position to grow in our key markets and business lines, allocating our resources to the highest return opportunities, all within a disciplined risk management framework. With that, I want to wrap up my comments by saying thank you to all our colleagues for their strong efforts, both in moving our strategy forward, completing the conversion, and getting us to where we are today. Operator, with that, Glenn and I will open up the line to questions.
spk04: Thank you. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again. One moment for your first question. Your first question comes from the line of Chris McGrady of Keefe, Brouillette, and Woods. Your line is open.
spk02: Oh, great. Morning. Hey, Chris. Morning. John, maybe a high-level question. This ongoing de-risking that you've been doing, I guess, where are you in terms of, like, how much more do you think you need to do? I mean, the loss rates on the office, the implied loss rates on the office from this quarter looks, you know, a bit higher than what you've been doing for the last several quarters. Just kind of big picture, where are you in terms of de-risking, you know, the books?
spk11: Yeah, it's interesting. I don't think, Chris, there's kind of a dedicated timeline. I think we're, as you heard me say, the billion to an office we have right now, you know, we sort of feel good about with respect on a relative basis to having, you know, getting credit enhancements, continuing to work on the portfolio. So for us, it's looking at loans, looking at the strategic nature of them, whether they're with you know, investors and clients that we know very well that we're going to continue doing business with, whether they're standalone, transactional, what the kind of metrics and dynamics are. And then each quarter, you know, Jason and the team sit down and say, hey, even though this may not be a problem now, this is something that's not strategic for us, or we have an opportunity at a reasonable economic cost to move down. So we're not really looking at a serial reduction in the exposure. We're being opportunistic. And we're making, I think, the right economic decisions because many of these loans are going to refinance fine. They're going to pay off fine, some of which we think in the future may have some problems just given the paradigm shift. But I think you'll see us continue at this level looking at a $25 million, $75 million portfolio or book of business in the quarter. And if there's a good economic strategic way to exit those credits, we will. But we're not kind of urgently and in a serial fashion trying to get rid of the exposure.
spk02: Okay, that's helpful. Maybe, Glenn, you gave the loan to deposit and expectations to the balance sheet. How should we be thinking about just the level of borrowings and, you know, securities growth from here or decline?
spk09: So I think I'll take securities first. So, you know, we're like 14%. within that range, depending on loan growth. The question on borrowings is, I think, you know, I think we're at a level right now where we probably expect to be pretty flat to the two, say, two plus billion mark.
spk02: Okay. And maybe last one. One of your peers turned to buyback back this quarter. I'm interested in your updated thoughts on whether buybacks at this point of the cycle make sense.
spk11: Yeah, Chris, I think it's a great question. You know, we bought back $50 million in the quarter in Q3. We clearly have capital levels and capacity to generate capital to, you know, continue the program. I would tell you that, you know, we're looking at this from a position of having good flexibility, but also recognizing that we want to make sure that we have capital if we do tuck in acquisition, if we do grow loans. significantly if we see cracks in the market from a credit perspective. So, I guess the way I would characterize it is I wouldn't rule it out, but I think we're being a little bit more cautious as we look in the fourth quarter to our activities in that area. Okay.
spk02: Thanks.
spk04: Thanks, John.
spk11: Thank you.
spk04: Your next question comes from Casey Hare of Jefferies. Your line is open.
spk07: Yeah, thanks. Good morning, everyone. Just following up, I guess, Glenn, on the NIM, so NIM's going to be flat in the fourth quarter, and borrowings, which obviously helped in the third quarter, the decline there, sounds like they're going to be flat. So what is the offset to the beta creep that you expect to keep NIM flat? Is it loan growth? Just looking for a little color on what holds NIM stable in the fourth quarter.
spk09: Yes. Sure. So some of it is loan growth. Some of it's the rate on loans where we get the full benefit of the periodic loans repricing. And then we do pick up one day, at least on a NIM basis from an earnings standpoint. And then it's pretty much some of that's neutralized by what we think deposit growth will be or deposit costs will be going into the fourth quarter. Like I said in my comments, we still think that there'll be deposit pressure albeit very more moderate than it's been certainly in the last couple quarters.
spk07: Okay, great. And then just a question on the funding strategy. I mean, your deposit growth was pretty broad-based. You know, Interlink still is doing a lot of the heavy lifting. You know, on that slide, what is it, slide five, it's 9% of your deposit growth.
spk09: franchise you know what long term is there is that a seal is there a ceiling that you have for interlink or is that is um you know is nine percent the right level just trying to figure out how how big that can become so you know we're in the process of doing our outlook over the next couple uh quarters and actually years and so you know what i think if we're at nine percent now depending on you know our sources of funds and other sources of funds we you know that could go plus or minus i you know it could go as high as 15 but you know office of planning right now, Casey.
spk07: Got it. Okay. And just last one for me on the efficiency. I know it's early for 24, but you guys obviously at 42% are more efficient than most of my coverage universe. John, you mentioned there are going to be some financial burdens about getting the bank ready to be 100 billion. What Can you pass that along, or is that something that you might let the efficiency ratio drip up?
spk11: Yeah, that's a good question. And again, as Glenn said, we're working through our plan now, and we're not ready to provide guidance for 24. But I will tell you, our sense is Look, we still have some opportunity coming out of the conversion as we consolidate sub ledgers and look at back office processes and consolidate call centers, which we still haven't completed. So, Casey, we do still have some merger related cost opportunities, cost save opportunities, and I kind of like where we are. Our feeling is we also have opportunities to invest and grow, particularly If the market greenlights with respect to loan growth and people feel comfortable about a soft landing, I think we can identify additional teams in commercial banking to bring on. We're definitely investing in products and capital markets and FX and card and other commercial treasury products that'll enhance our balance of non-interest income. So our kind of view is we think we can operate steadily in the low 40s efficiency ratio and to the extent we can gain more cost savings that will provide us an opportunity to invest in key products and services and people. So, you know, if we can continue to post the numbers that we promised when we did the merger, the 20% ROATC, the 1.5 ROA, and, you know, an efficiency ratio in the low 40s, I think size, scale, and momentum will allow us to keep that efficiency ratio in the low 40s without starving the bank with respect to future investments. And then if you fast forward, right, three years, you look at the size of our balance sheet as we approach $100 billion, I think we'll have some optionality, and we'll be in a better place than others who are similarly situated, given how kind of efficient our operating model is.
spk02: Great. Thank you.
spk04: Your next question comes from the line of Matthew Brees of Stevens, Inc. Your line is open. Hey, good morning.
spk14: I know office DRE grabs a lot of the attention these days, but I was curious, thoughts and updated color on the sponsor specialty and leverage loan book. How have those portfolios been performing in a higher rate environment?
spk11: Yeah, Matt, so far so good. We've talked about it before. Those companies that we underwrite there tend to have protectable, predictable cash flow streams, recurring cash flow streams, contractual cash flow streams. And so we haven't seen a deterioration, significant deterioration in the credit profile. I'd say it's behaving like the rest of the book, probably some level of moderate negative risk rating migration, but it hasn't spooked us at all. And again, it's always hard to predict the future, but one of the wonderful things about that portfolio, besides the type of companies that we lend to, are the private equity firms that we've been doing business with for 10 and 20 years that are kind of flush with cash, raising new funds, and really not reticent to capitulate and give up these really good companies. No question about the fact that these are generally floating rate loans, so their debt service has increased. They generally are lower in contractual amortization, so really it's the interest expense And so far, you know, the capacity to continue to service that debt has seemed strong. And obviously, we feel comfort in the fact that we've got strong private equity firms behind those companies in case things start to go sideways. Generally, we work things through with them and the deals continue to perform. So, so far, I'd say it's, you know, coming out according to Hoyle, which is they're able to service the increased interest rate cost and we seem to have, you know, pretty stable performance in that book.
spk14: And then just a reminder, what is the size of the, you know, what meets definition of leveraged loans and then anything beyond that that would be considered, you know, a syndicated loan portfolio?
spk11: Yeah, this is, it's tricky because there's overlap everywhere, right? And we've reported on our Regulatory statutory leverage loans that those have actually remained relatively flat over the last couple quarters It's about six percent of our total loan book or three billion dollars and most of that as you Intimate it is in our sponsored specialty book our shared national credits are About twelve percent and there's some subset of that which is leveraged but about twelve percent of total loans that number is actually down from you know, pre-merger Webster numbers as a percentage of total loans, just given kind of the mix that came together between Webster and Sterling. Again, you know, no kind of differentiated performance there. So I've told the story a million times to the street over the last 15 years about shared national credits. We don't have a buy-side desk. We're not a stuffy for the big banks or the non-banks who are syndicating out loans. Our use of shared national credits over the last 15 years has been in strategy or in geography or in product, meaning that it's a middle market or corporate company within our middle market footprint where we have cross-sell opportunities, direct access to management, but they have a $700 million credit facility and certainly we don't have the balance sheet to provide that. So we'll participate in that credit and cross-sell. It's in our sponsor and specialty group where we have expertise in technology and Other industry verticals where we'll strategically participate with access to management. Again, we underwrite and portfolio manage all of our shared national credits exactly the same way we do a bilateral credit. And our shared national credit book has a weighted average risk rating of about a full half a turn, 50 basis points better than the overall weighted average risk rating of our commercial portfolio because those bigger companies tend to be more resilient and have more revenue streams. Those are the data points, and I figured I'd share with you our view on how we go about underwriting and participating in shared national credits.
spk14: So understanding it's likely a blend of the leverage loan portfolio, probably some real estate in there. Is it fair to assume the underwriting characteristics like sponsor and specialty from a leverage perspective are similar to that book, and from a commercial real estate perspective are similar to the LTVs and debt service coverage ratios we find in that book.
spk11: Yeah, I think that's a fair statement, but I'll also tell you we have very little shared national credit exposure in commercial real estate, and I mean very little. Most of our shared national credit exposure is in sponsor and specialty in our middle market geography groups on mid-corporate and large corporate relationships we have And then we have some in asset-based lending. Those are the ones I worry about the least. Those are to larger retailers, strong agents, cash dominion. We generally don't have any problems with those transactions. So we don't have very much shared national credit exposure in commercial real estate. It's just not been one of our tools.
spk14: Understood. Okay. Last one for me. John, you had mentioned you know, keeping capital handy for perhaps tuck-in acquisitions? I know historically it's been discussions around, you know, perhaps HSA tuck-in acquisitions, but I was curious if that comment meant anything broader as in whole banks or other sorts of fee income vehicles.
spk11: Yeah, no, a great question, and I think I clearly mean sort of complementary acquisitions around fee generating or deposit gathering businesses. where we have a path to some organic growth but would like to enhance and speed up that path to get a better balance of non-interest income and interest income rather than a whole bank acquisition. We don't feel that right now. You never say never, and I've learned my lesson there, but given where we are, the great integration and conversion we just did, given the look at the dynamics in the marketplace, I would say a highly unlikely whole bank activity on the inorganic side, and it would be something that would be targeted on further low-cost deposit gathering or fee-generating businesses that are complementary to our existing activities.
spk14: Great. I'll leave it there. Thank you for taking all my questions. Thank you.
spk04: Your next question comes from the line of Mark Fitzgibbon of Piper Sandler. Your line is open.
spk10: Hey, guys. Good morning. Glenn, I wonder... I wondered if you could share your thoughts on restructuring or selling available for sale securities in the fourth quarter, given that rates may be stuck up here for a while.
spk09: Yeah, so it is something we looked at, Mark, and you know that we did that in the first quarter of this year. We restructured about $400 million at that time. What I would say is it's something we continually look at, and we balance that obviously against our capital levels and our capital forecast and things that we see as far as that. I'll leave it at there is that it's something that we continue to look at. And there's obviously some opportunity there. It's competing against capital for other initiatives as well. So that's where we are on that.
spk10: Okay. And then can you update us on how much you sold in this quarter in performing office loans and roughly where you sold those relative to PAR?
spk09: So I think in my comments, it was the 78 million that we sold. And if you just do the math on the provision of $13 million, that equates to about $0.83 of the dollar.
spk10: Okay, great. And then lastly, hopefully there aren't any more failed banks, but if there are, would Webster be a likely interested buyer in some FDIC transactions?
spk11: Yeah, Mark, it's interesting, right? I just made the comment to Matt that whole bank acquisitions are not high priority for us. I do think that it would behoove us to just make sure that if there's a clear strategic opportunity that makes a ton of sense economically, I guess I wouldn't exclude us. I'm hoping there are no further failed banks as well, but I think hopefully if we keep executing where we are, then the dust settles. I think we'll be in a good position and have the right financial characteristics and strength to be a buyer of a good strategic bank if something happens that way. So I wouldn't rule it out, but it's certainly not on our game plan.
spk10: Thank you.
spk11: Thank you.
spk04: Again, if you have a question, please press star 1 on the telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again. Your next question comes from the line of Brode Preston of UBS. Your line is open.
spk13: Hey, good morning, everyone. How are you? Good morning. Hey, sorry I joined a little bit late. So if I repeat anything, just feel free to tell me to review the transcript. But I did think, John, I think I saw you gave the shared national credit percentage at 12%. Do you happen to have what you guys are the lead underwriter on or the agent on?
spk11: Yeah, less than 5% of that.
spk13: Okay, so less than 5 of the 12. Correct. Okay, cool. And do you happen to have what the reserve on the office portfolio is at this point?
spk11: We haven't disclosed that number. You know, obviously it's moved up and it's at a higher level than the overall portfolio, but we don't disclose that, Brock.
spk13: Okay. You know, Glenn, could you maybe speak around what the puts and the takes will be as it relates to, you know, NII and the NIM going forward? You know, maybe help me better understand, you know, the cadence of fixed asset repricing throughout, you know, the fourth quarter and then through 2024 and, you know, what the impacts the loan yields will be for that?
spk09: Sure. Yeah, let me give you a sense of, and I'll just look at, you know, the two dynamics that we have there, Brody, are, you know, the fixed rate loans repricing. And that, if you think about it, it's about $1.3 billion a quarter, right? So if you think, you just think about that over the next couple quarters, it's about $1.3 billion repricing. And, you know, given our rate forecast, you'd probably pick up about 275, 250 basis points on that as it rolls forward. right over the next couple quarters and then depending on where the fed is in the back end of the year you know that might come in a little bit but that that's that um dynamic on the on the uh on the fixed rate loans i think about it in terms of nim it probably supports our nim by about four basis points going forward and then likewise on the investment portfolio you have about 300 million uh that that is typically reinvested and for that we're probably picking up about 450 basis points now you know that'll probably drop as rates change to to like the low threes, mid threes. But there again, you know, we're picking up about two basis points in NIM support going forward. So if I look at those two factors, as well as the periodic book, which will continue to reprice on the loan side, you know, and then so you have that as going as a favorable tailwind. And then the wild card here is deposit pricing, right? And so we do think, we did see it moderate in the fourth quarter. We do think it's going to continue to moderate over the next couple quarters. And then the Fed will begin to cut. There'll be a natural, like, 90-day lag on that. But we think the support that we have on the repricing side, reinvestment side, will sort of moderate any pressures that we get on the deposit side, at least for the first half of the year. And then we should actually, you know, we should be well-positioned if the Fed does proceed with cutting on the second half, back half of the year.
spk13: Got it. Thank you for that. And then, John, I know you talked earlier about you know, kind of the leverage loan and the sponsor, you know, specialty sponsor book. But I, you know, I guess I wanted to better understand kind of like some of the finer points, the details, the underwriting there, and kind of the things you do to structure those loans to really give you protection. And I'm not expecting you to speak to the specific credit, but, you know, like, you know, you all were on the Rite Aid credit files for bankruptcy, but like, you know, the ABL Philo notes in the market are trading at 92, 93% of par. And so like market obviously expects very little loss. You know, it looks like you got you guys in the other banks are in a position to kind of get paid back first. You know, and it feels really well collateralized. So could you just kind of help us better understand the structure of those deals and what you kind of do to help protect yourself in the event that, you know, something goes wrong?
spk11: Yeah, I guess there's a couple questions there because you threw in the ABL deal at the end, right? And so, you know, that's, I think that's a completely different animal. You're, you know, underwriting against liquidation value on a large retail company. That's kind of standard asset-based lending. I do think the market believes what everybody believes is someone will come in and provide dip financing and there'll be an orderly liquidation and everyone will get paid out. And we've seen that story play over and over again. In sponsor and specialty business, it's about the strength of the people, the continuity. We've been doing it for 20 years. We deal with sponsors we know who support credits and have expertise in the industries and sectors they're in. You'd be amazed at the level of diligence and detail we do in technology. If we're doing a deal, a software as a service deal, we're doing third-party evaluations of the software. We're evaluating the contracts, the end users. We're We know the management team very well. We know the sponsors very well. We structure the deals so there's some level of amortization. We don't chase, as you know, the last couple of turns of leverage where the non-banks are chasing. We play in a different market. So it's just a combination of having the right people, a really disciplined approach, staying in the swim lanes and the sectors that we know and understand, and not moving off of of that discipline process. And it's why through the great financial crisis and through the pandemic and through this higher interest rate environment, we've been able to see, you know, resilience in that portfolio.
spk13: Got it. And then the last one for me, I just wanted to ask her on the HSA book. I feel like this has been a topic that's come up sporadically, you know, over the last several years, but I wanted to ask just because other banks are looking to potentially monetize unique assets that they have. And so when I look at kind of what's happened in HSA, it feels like some of your non-bank competitors have been able to really kind of pay really high multiples to acquire other HSA portfolios that otherwise I think if, you know, if they had the same investor base that you do, they wouldn't be able to pay as much. And so, you know, with the growth in that business line kind of slowing to some extent and, you know, the value of it really not showing up in the multiple and, you know, it being tough to kind of inorganically grow that business, you know, just given that you're treated like a bank versus others that are treated like non-banks, like, How do you think about maybe, you know, monetizing that, you know, and, you know, doing something more strategic there to help your investors realize the full value of that business?
spk11: That's a great question. And I think all of your observations in general are correct. And we've talked about it over time. You know, the basic premise for us is that we have a very efficient way to deploy long duration, low cost deposits as a bank that really help profitability for us. And while the market has slowed, if you look at it, you're still growing deposits at very low costs in the mid to high single digits. And there aren't many channels that are doing that. And we are continuing to grow along with the market on an organic basis. So I take your point in terms of the inorganic growth of some of the other top five players. So it is very valuable to us. It helps us grow. generate the kind of returns and profitability we have, albeit it's a smaller part of the whole after the MOE. We are frustrated that the market doesn't recognize the value that we're still building in that business as part of the bank. And as you know, we continue, we talk about it all the time, to evaluate HSA in the bank and the value it has in the bank, outside of the bank, because we have an obligation to make sure that we're making the best decisions for our shareholders as we move forward. And so up until now, it's continued, particularly in this interest rate environment, it's pretty easy for us to say operating HSA as a division of our bank creates the most value for our shareholders in the long term in terms of the quality and the value of the cash flows. We don't think the market, you know, where we're trading at a seven times multiple in future earnings is reflecting that unique company and business. And, you know, we want to continue to keep informing people and educating people about where we are. We were able to execute on the transaction last year, which gave us, you know, higher levels of user experience and a better mousetrap, if you will. And I think it's helped us compete in the marketplace. We are still looking every time there's a deal in the market of another portfolio because the market keeps consolidating. I think the top 10 now represent 83% of the market. You know, we'll try and be a participant in that. But I think it's going to be a continual evaluation for us, and we'll make the right decision on where HSA belongs, given the value we can create owning it or the value that it would receive as a different company or a company that was part of a joint venture or somewhere else outside the bank.
spk13: Great. Thank you for taking my questions, everyone. I appreciate it.
spk04: Your next question comes from the line of Daniel Tameo of Raymond James. Your line is open.
spk03: Good morning, everyone. Thanks for taking my question. Maybe just starting in the decline in the commercial industrial, commercial loan areas, and you talked about de-emphasizing some asset classes there. Just give a little more detail on where you were pulling back, and I apologize I jumped on a little late if you already covered that.
spk11: No, it's quite all right. It's a good question, and we haven't covered it in detail. So the decline across the board on the CNI side was generally driven by we had mortgage warehouse obviously down, and I think, you know, you'll likely see that continuing to reduce from a strategic perspective. We were very careful on transaction-only ABL and equipment finance in the quarter since the crisis in March. And so those did grow rapidly and may have had small declines. Our fund banking activity, which high quality, you know, fund banking, loans, equity subscription lines to private equity firms was down about half a billion dollars. And that was driven by one big payoff and then just lower utilization. Our overall middle market CNI utilization on lines after kind of holding steady for several quarters at 50% was down into the mid 40s. So we did see seasonally lower usage. And I don't know what that portends in terms of client confidence or anything, but utilization was lower as well. So that kind of drove the quarter results. Some of it was us pulling back on levers. Some of it was a seasonally slow third quarter. more sluggish loan growth, and that's where we ended up. I think as you go forward, we've talked about really making sure that we have the liquidity capacity, the loan-to-deposit ratio, and the capital to grow those full relationships across our middle market businesses, other ancillary C&I businesses, sponsor and specialty, non-office commercial real estate. We are seeing some level of increased demand as we move into the fourth quarter. Our pipeline's up about half a billion dollars. So I think you think we'll continue to see mortgage warehouse run down. There may be a couple of other small subscale businesses where we won't be generating the kind of loan growth that we've generated in the past. but we think we can offset that with our core franchise building loan generation.
spk03: Terrific. And then on the flip side, the commercial classified loans were up both on an absolute basis and as a percentage of that portfolio. Maybe you could talk a little bit about what drove that increase.
spk11: Sure, happy to. First of all, and I didn't say up in my front comments, but I did reference that that level of, classifies at 1.74% of a smaller portfolio in the quarter is actually 100 basis points lower than Webster's classified percentage in the fourth quarter of 2019 before the pandemic. So just a reminder, again, that the entire industry has been benefiting from really, really favorable credit metrics, and this is just a small step, I think, towards a more normalized rate going forward. But in terms of the actual contributions there, there weren't any kind of correlations across geography, asset class, business line. We saw some CNI in healthcare. We had a small portion in ABL. We had some office migration that we talked about prior, and then just generally across the other CNI categories. So it really wasn't, we didn't see correlated risk. We just saw credit-specific migration as part of our overall modest negative risk rating migration in the portfolio.
spk03: Okay, terrific. And lastly, just one for Glenn on the hedging strategy and how you expect the net interest income would react to rate cuts if they do materialize next year.
spk09: Yeah, so Daniel, good morning. We did talk a little about that as we look. We're not providing an outlook for 2024 at this point. The point I made earlier is that I think our NIM will continue to be supported into the fourth quarter and into the next couple quarters through the benefit of both fixed rate loans repricing, investment securities repricing, as well as the periodic loans repricing. Some of that will be obviously offset by deposit costs and our thinking on where the cumulative deposit beta will end up. But I think generally, that's how we're feeling going into the next couple quarters.
spk03: Okay. Thanks for all the color, guys. Appreciate it.
spk11: Thank you.
spk04: Your next question comes from the line of Steve Alexopoulos of J.P. Morgan. Your line is open.
spk05: Hey, good morning, everyone. Alex Law on Steve.
spk11: Hey, Alex.
spk05: Hey, I want to touch on deposits. So, Non-interest-bearing deposits were up on a period-end basis in the quarter. What drove that uptake? Was it seasonal inflows? And is it fair to say that the customers chasing higher-yield products in these demand balances are largely done?
spk09: Yeah, so let me take that. But I think there is a portion of the increase in non-interest-bearing deposits that was related to the government inflow, which is seasonality. I think, you know, the bigger point is we've gone back and looked at DDA because we're, you know, as we look at our forecast, and I've gone back to, all the way back to 2019 when, if I add the combination of Webster and Sterling, you know, we had about $40 billion in combined deposits. And at that point, the DDA represented about 21%. If I looked at the third quarter and did the same sort of analysis and I stripped out the impact of Interlink, that's relatively new, we'd be in that 21% range. So it's pre-pandemic. And if I look to where we are, it's typically run about 21%. I think there will be some continued normalization in the average balances as customers move. And we've looked at this on a customer by customer basis. So there is some migration into higher yielding type of products. But I think some of that, so say, you know, I think we'll get normalization over the next couple quarters, but I think some of that will be offset by growth opportunities through whether it's new relationship acquisitions or treasury management type services. So I think if you think about that 11-4 we have, there'll be puts and takes on that, but, you know, over the course of time, and we're not giving guidance for 24, you know, that should be somewhere in the range.
spk11: I agree with that, Brian. And, yeah, Alex, I think your last statement was right, that we're going to continue to see a creep up of the deposit costs there in the core, but that the rate of increase is slowing down because the customer behavior, people that were more in tune and it was more important to them to chase rate have done so.
spk05: Thank you. And speaking of growth opportunities, now that the conversion with Sterling is done, Do you see any material cross-selling opportunities in terms of growing these demand deposits now that you're integrated with Sterling?
spk11: Yeah, I mean, I think I kind of hinted to that, Alex, that one of the things that getting on our single core platform now and also being able to kind of pivot our resources to development and build out, we've got a robust plan on the treasury side side in commercial, and that's broadly defined with cash management products, FX, capital markets, other products, corporate card, where we believe that having deeper penetration and having a broader product set for our really loyal commercial customers will have the added benefit of growing core operating deposits. So I do think that that's something that we believe we can execute on and we believe will be successful as we move forward post-converting.
spk05: Thank you for that. And then I just want to follow up on the HSA business. So these balances for the past three quarters have been in the $8.2 billion range. Can you talk about what it would take in the macro environment for a stronger HSA adoption and for these balances to start increasing? John, I think you said mid to high single digit. How do we get to the higher end of the range? Would a weaker job market actually benefit this range? Thanks.
spk11: That's interesting. We used to answer these questions all the time. But I think generally higher health care costs push companies to higher adoption of full replacement high deductible health plans. Definitely, in a recessionary environment, if labor market is not quite as tight, companies are more willing to move to higher replacement costs. I will tell you, we believe that part of, you know, full transparency, right, part of the reason the market slowed a bit is that there's been significant penetration and adoption now, so there aren't as many green fields in terms of new opportunities. But in this economic environment and in this job market environment, we have obviously seen slower growth. And I'm not rooting for a worse job market or a big recession so that we get a slight increase in our HSA growth. But I think those are some of the dynamics. There are higher health care costs coming in. So I do know that people are continuing to look at it and Chad does see opportunity, and, you know, we're obviously got a lot of RFPs out there, but the market, you know, from the 20% growth days down to the 10% growth days, there's a lot of dynamics there, and it's not just economic. It's also just a maturing of the industry.
spk04: Thank you. Now that we're close to end of conference, we please ask that you try to restrict yourself to one question so we can get everyone in. The next question comes from the line of Bernie Von Giziki of Deutsche Bank. Your line is open.
spk01: Yeah. Hi, good morning. Hey, my question is on fees specifically. So you talked about the pressure on fees from less capital markets activity, but you have seen signs of an improving outlook into next year. You know, what are you hearing from clients? You know, what signs do you see that helps drive that improving outlook? And maybe if I just combine this on the sterling integration. You basically highlighted some areas in treasury cash management, but in the fee side, can you provide any size timing of these opportunities so cap markets pick up next year and sterling integration opportunities sizing?
spk11: Yeah, it's a great question. I think I'll stick with Glenn's comment that we're working through our plan right now for 24, and we haven't sized some of those opportunities in the timing of the rollout As it relates to BAU and organic where we are, we did see in the quarter a relatively healthy level of non-interest income. And underneath that were some good signs, a little bit more of direct investment equity tag in income, which shows some more activity on the sponsor side and that people may be getting more active as they normally do at year end. And so that's a good sign for us as we move forward. Obviously, the swap market, given where interest rates are, has been kind of down, but we may see some more activity just given the fact that the Fed may pivot. So there's some decent signs, and then we'll be able to, as we give guidance in Q4, we run out our roadmap on plan, be able to maybe size some of the incremental benefit of post-conversion investments.
spk04: Thank you. Your next question comes from the line of Timur Braziler of Wells Fargo. Your line is open.
spk12: Hi, good morning. I'm just wondering what the remaining credit mark is on the Sterling book, and then if you look at the link border increase in allowance, how much of that is commensurate with the link border increase in classified loans, and I'm just wondering kind of your expectation for allowance trajectory here given the backward backdrop.
spk11: Yeah, good question. You know, I always kind of like and dislike answering these CECL questions because there's obviously a huge amount of work that goes into the modeling. Obviously, a classified loan has a higher reserve on it, so the dynamics in the quarter for CECL would be Higher level of classified, overall lower loan balances, stable non-accruals and charge-off levels, an economic outlook for us as we're moving forward. It's why you still see a build in most of the industry right now because of concerns of office and others. And then qualitative overlays on what you believe is going on in any particular portfolio like an office portfolio. The classified certainly would have been a component to add more reserves, but there are some offsets like lower loan balances and stability in other areas. And then obviously the economic outlook is still uncertain, which drives to a few basis point increase. And I'm giving you kind of the qualitative high level because obviously it's all model driven at the end of the day.
spk09: Yeah. And Tim, the only thing I would point out is we sort of laid this out on page 15 of the slides, right? you can see the impact of lower loan balances was $8 million, and then the third quarter macro and credit environment was a build of 43. And if you look at the chart below, there hasn't been that much movement, you know, really in unemployment and GDP growth and stuff like that. So a portion of that is risk migration, which you see in the classifieds, and that's how I'd sort of characterize it.
spk04: Thank you. And your last question comes from the line of Laurie Hunsaker of Seaport Research Partners. Your line is open.
spk00: Great. Hi. Thanks, John and Glenn. Good morning. So just wanted to circle back to office here. So slide four is great, but just wondered a couple things. Number one, can you help us think about specifically in New York City and Boston of that $1.17 billion? How much of that is New York City Class A versus B? How much is Boston Class A versus B? And then also your slide four is only investor. Can you help us think about the owner-occupied book, how big that is? Any concerns that you're seeing there? Obviously, owner-occupied is lower risk, but still some of the same risks. And then the last part of the office question, the jump in past due loans from $46 million to $71 million, You know roughly how much of how much of that 20 million jump was office related.
spk11: Thank you All right, I may ask you to come back on the last question but the one quest so the mix of a and B is pretty similar around 50 50 in all the markets which also ladders up to the overall we about 23 percent right of remaining offices in New York City and that's about 50 50 class a and class B and Boston is smaller in the geography, under 10% of that, and it's also about 50-50 in terms of Class A and Class B. You asked about non-investor CREE, owner-occupied CREE, so those would be C&I companies that we lend to where we have office collateral. That's a relatively small portion of our overall portfolio. It's around $250 million, which is pretty small. Regulatorily and internally, we underwrite those as C&I loans based on the cash flows of the company with having just the enhanced secondary source of repayment in the office. We've seen no deterioration in that portfolio at all. And what was the last question, Laurie?
spk00: Yeah, and thanks for that. The jump in the past due loans, the $46 million to $71 million, how much of that, if any, was offset?
spk11: Oh, that's a great question. I don't know if I know the answer to that offhand, but I will tell you one thing is that there was a $15 million payment made on the 2nd of October. So one of them was an administrative delinquency, and so that would tell you that We're down from 42 to whatever that would be, 27, if I can do my math right. Mostly equipment finance loans in there. So it really wasn't commercial real estate. It's not.
spk00: Right. Thank you.
spk11: You got it.
spk04: There are no further questions at this time. I will now turn the call over to John Ciula, CEO, for closing remarks.
spk11: Thank you very much for joining us on this long call this morning. Enjoy the day.
spk04: This concludes today's conference call. You may now disconnect.
spk06: Long call this morning. Enjoy the day.
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