Webster Financial Corporation

Good morning. Welcome to the Webster Financial Third Quarter 2024 earnings call. Please note this event is being recorded. I would now like to introduce Webster's Director of Investor Relations, Emlyn Harmon, to introduce the call. Mr. Harmon, please go ahead.

Good morning. Before we begin our remarks, I want to remind you that the comments made by management may include forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. They're subject to the Safe Harbor rules. Please review the forward-looking disclaimer in Safe Harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. The presentation and company management's remarks can be found on the company's investor relations site at .websterbank.com. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up prior to the poor returning to the queue. I'll now turn it over to Webster Financial CEO and Chairman John Ciula.

Thanks, Emlyn. Good morning and welcome to Webster Financial Corporation's third quarter 2024 earnings call. We appreciate you joining us this morning. I'm very pleased to welcome Neil Holland as he is joining his first earnings call as Webster's CFO. As we anticipated, Neil has hit the ground running since he officially stepped into the role in mid-August. And you can already see the impact of some of the steps his team has taken to optimize the positioning of our balance sheet and grow interest income this quarter. Luis Maciani, Webster's President and Chief Operating Officer, is also joining us for the Q&A portion of the call today. I'll provide remarks on our high-level results and operations before turning it over to Neil to cover our financial results in greater detail. We're really pleased with our strategic and tactical accomplishments in the quarter. I'll hit the highlights, and Neil will provide more details. We grew deposits .6% in the quarter, including growth in DDA, overall commercial deposits, and HSA. We grew loans .7% in the quarter, consistent with our full-year growth expectations. Excluding the $300 million securitization we performed to reduce our Cree concentration, our growth was .3% in the quarter, with accelerating growth in C&I categories. We further reduced our Cree concentration through payoffs and reclassification of certain health care-related loans. As a result, our Cree outstanding has a percentage of Tier 1 capital and reserves declined from 285% to approximately 265% at the end of Q3. Our net interest income grew quarter over quarter and increased over last year's comparable period, in line with our full-year expectations. We benefited from asset growth and a balance sheet repositioning. We continued to mitigate our asset sensitivity, positioning us well as rates continue to come down. Our capital levels remained strong, with our CET1 now in excess of our current operating target of 11%, resulting from earnings and capital optimization activities, providing us capital flexibility in 4Q and beyond. Our expenses remained well-managed, resulting in a third-quarter efficiency ratio of 45%, still in an industry-leading position. I'll now turn to our financial performance for the quarter, beginning on slide two. On an adjusted basis for the quarter, we generated a return on average assets of .22% and a return on tangible common equity of 17.3%. Our adjusted EPS was $1.34. Our profitability and return metrics remain favorable to peers again this quarter. At this point, most of you are familiar with slide three, which illustrates our diverse and versatile deposit base. As I mentioned up front, our robust growth this period came from a breadth of the segments on this slide, including lower-cost channels in our commercial bank, HSA bank, and Ametros. We executed on the $400 million deposit opportunity for HSA bank we discussed last quarter, which provided a nice boost to deposits there. Strong execution within the commercial bank added to lower-cost funding growth as well. Our ability to generate low-cost funding across a number of business segments continues to be a tremendous advantage in growing our balance sheet efficiently and profitably. Moving to slide four, I will review our commercial real estate portfolio as that has been a continued focus of investors. The segment of the Cree portfolio on which we have been most focused continues to be traditional office. The portfolio balance continues to shrink with $917 million in outstandings at quarter end, down roughly 45% from the first half of 2022. We did see some continued negative migration this quarter with non-accrual loans decreasing to 14% from 9% last quarter, largely as a result of two larger credits. We continue to be proactive in identifying and managing problem credits and prudently managing reserves in the sector. While it has been an investor-focused, there have been no significant changes in the quality of our rent-regulated multifamily portfolio where credit performance has held up consistently well. On credit more generally, we continue to see negative risk rating migration in the quarter as we keep a close eye on credit at a later stage in the cycle. We did see our non-accrual loans increase by $50 million this quarter, primarily driven by the aforementioned office portfolio migration. Outside of Cree office, negative migration was generally credit-specific across the portfolio and not driven by one industry, sector, or asset class, although healthcare-related portfolios continue to show some weakness. While we have seen continued migration and will continue to be proactive in our risk reviews, our realization of loan losses remains in the range we have observed in recent quarters and importantly is consistent with through the cycle and pre-pandemic commercial annualized charge-off rates. With that, I'll turn it over to Neil to cover our financials in more detail.

Thanks, John, and good morning, everyone. I'll start on slide five with our gaps in adjusted earnings for the quarter. On an adjusted basis, we reported net income to common shareholders, $230 million, and diluted EPS of $1.34. Adjustments consisted of a pre-tax $20 million securities repositioning charge, a $16 million impact from the exit of non-core factoring operations, and a $22 million of strategic restructuring costs. Turning to slide six, total assets were $79 billion at period end, up $2.6 billion from the second quarter, mirrored by robust deposit growth of $2.2 billion. Deposit growth was aided by a seasonal surge in public funds of $1.1 billion. As a result of the substantial deposit growth, we are holding higher cash balances than we have historically. We also exhibited solid loan growth of 1.3%, excluding the securitization. The loan to deposit ratio was 80.5%. Tangible book value increased to $33.26 per common share, with the increase from the prior quarter driven by retained earnings and positive movement in AOCI due to the low rate environment. Capital levels improved significantly. The common equity tier one ratio was 11.23%, a 64 basis points link quarter, and our tangible common equity ratio was 7.48%. In addition to the internal capital generation, the TCE ratio benefited from the improvement in AOCI. The common equity tier one ratio also benefited from several actions we undertook to optimize asset risk weighting, as well as the securitization. In total, these actions added 44 basis points to our common equity tier one ratio. Loan trends are highlighted on slide seven. In total, loans were up 374 million, or .7% link quarter. Excluding CRE, other loan categories grew by .2% this quarter. Commercial real estate balances were down 570 million, as we experienced some natural attrition in addition to the securitization. This accelerates our path to our target of 250% of capital plus reserves. The securitization frees capacity and allows us to add commercial real estate relationships with attractive risk reward characteristics. The yield on the portfolio is flat, given the mix of new loan originations and repricing of floating rate loans on the September Fed move. We provide additional detail on deposits on slide eight. We grew total deposits by 2.2 billion, with diverse growth across categories. The pace was accelerated this quarter due to seasonal inflows of public deposits and a discreet opportunity with an HSA bank that added 400 million of low-cost deposits. DDA balances increased by over 700 million this quarter, with the majority of the increase coming from seasonal effects. However, it is still encouraging to see normalization in the DDA balances after several quarters of declines. Moving to slide nine, net interest income was up 18 million from the prior quarter, driven by balance sheet growth and higher earning asset yields. Adjusted non-interest income was up 1 million. Adjusted expenses were up 2 million, and the provision decreased by 5 million. Excluding adjustments, our tax rate was 22.2%. Overall, adjusted net income was up 14 million, relative to the prior quarter. Our efficiency ratio was 45%. On slide 10, we highlight net interest income, which increased 18 million, or .1% link quarter, driven by balance sheet growth and the increased earning asset yield. The net interest margin was up four basis points to 3.36. Our yield on earning assets increased four basis points over the prior quarter, with loan yields flat and the securities portfolio of 24 basis points. In the third quarter, we incrementally sold securities with a book value of 304 million and reinvested with an approximate 400 basis point improvement in yields, with minimal impact to capital ratios. We anticipate an earn back of less than two years. On net, we were able to maintain our total deposit cost effectively flat for the quarter. Slide 11 illustrates the progress Webster has made in mitigating its asset sensitivity over the past three years, by increasing the duration of our assets and reducing the duration of our liabilities. On slide 12 is non-interest income, which was up 1 million versus prior quarter on an adjusted basis. Adjusted income included both a 3.8 million negative CBA and 4.4 million gain on the securitization. We continue to experience pressure on core fee growth. Year over year, fees are up three million, including the impact of the ametris acquisition, offset by year over year changes in CBA. Non-interest expense is on slide 13. We reported adjusted expenses of 328 million, up 2 million from the prior quarter, driven by modest increases in technology, human capital and occupancy costs. Slide 14 details components of our allowance for credit losses, which was up 19 million relative to the prior quarter. After booking 35 million in net charge-offs, we recorded 54 million provision, primarily due to credit factors. As a result, our allowance coverage to loans increased to 132 basis points from 130 basis points last quarter. Slide 15 highlights our key asset quality metrics. As you can see on the four charts, we saw continued migration in the quarter. Net charge-offs came in at 36 million versus 33 million in the prior quarter. On slide 16, we enhanced our already strong capital levels. As we noted previously, we took several actions to improve our capital ratios in the quarter, including reviewing the risk weighting of our multifamily, lender finance and public sector portfolios, as well as the securitization of multifamily loans. These actions in combination with organic capital generation and lower AOCI losses led to a significant increase in our capital ratios this quarter. I will wrap up my comments on slide 17 with our outlets for the fourth quarter. We expect loans to grow by one to 1.5%, with growth across the diverse categories, including the potential for some modest growth in commercial real estate. We are anticipating deposits will decline by around 1% as seasonality in the public funds business leads to outflows. We expect net interest income in the range of 590 to 600 million on a non-FTE basis. This is within the guidance range we provided on the second quarter earnings call. Our net interest income outlook assumes 50 basis points of cuts in the first fourth quarter, with 25 basis points each in November and December. Adjusted non-interest income will be 85 to $90 million. We anticipate adjusted expenses will be in the range of 335 million with an efficiency ratio in the mid 40s. Our near term common equity tier one ratio remains 11%. With that, I'll turn it back to John for closing remarks.

Thanks Neil. I'm anticipating we'll receive questions on our priorities for capital allocation, given the sharp increase in our capital ratios in the quarter. While we continue to prioritize funding organic balance sheet growth and complimentary tuck in acquisitions, our capacity to return capital to shareholders has increased since the second quarter, and we will be prudent and proactive managers of capital. We are well positioned to maintain our profitability profile. As Neil detailed, we have proactively managed our balance sheet over the past year to ensure stable net interest income in a declining interest rate environment, both in terms of managing our funding costs and tweaking the profile of our earning assets. We have capacity and capability to grow our balance sheet via a diversified mix of loan and deposit categories, while at the same time maintaining flexibility on capital allocation. And our efficiency ratio remains among the best of our peers. We have retained superior profitability, even as we invest in people processes and technology. On the latter, over the last 24 months, we have made significant investments to strengthen our technology foundation, including the modernization of our core banking platform, building advanced BSA AML competencies, and heightening our cybersecurity and cloud capabilities. Finally, I'd like to thank our colleagues for their continued effort. Their hard work is reflected in our performance this quarter, particularly in our strong deposit growth in favorable categories. Thank you again for joining us today. Operator, we will open the line to questions.

Thank you. If you'd like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We ask that you please limit yourself to one question and one follow-up, then rejoin the queue if needed. Please ensure your line is not on mute when called upon. Your first question comes from the line of Chris McGrady with KBW. Your line is open.

Hey, good morning. Morning, Chris. Maybe John or Neil, the actions you took with the balance sheet, obviously set up for a better, more neutrally positioned balance sheet going into 25. How do we think about, I guess, TRough NII? Is Q4 the TRough? How are you thinking about it, given you've freed up a little bit of space on the balance sheet? Yeah, maybe I'll leave it there.

Yeah, so we came in at 336 for the quarter. As you look at how we exited Q3, we're going to be holding a little bit more cash on the balance sheet, which in Q4 will have a slight drag to NIM. So we're kind of in the Q4, we're going to be in 332 range and having that exit velocity in the next year, and then kind of staying right in that level into 25 is how we think about NIM. So we think we're at a stable NIM. We may be at plus or minus three basis points as we move forward, but that's the range we're looking at going forward, into 25.

Okay, perfect. And then my follow-up, John, you alluded to the capital return flexibility. Could you maybe just rank order and also the timing of which you think you might be able to return more capital?

Yeah, I mean, I think, you know, we always talk about kind of prioritizing for organic balance sheet growth, thinking about doing things like we've done with Ametros and Interlink and Bend. And then obviously, if there's no other productive use of capital, I do think given where we are and the fact that we do think with interest rates coming down, that we should see an inflection point in credit as we get into this quarter in the first half of 25, that we're more likely to begin repurchases again, absent other organic opportunities to deploy that capital, Chris. So I think we're there. We feel really good about our capital levels now. We have some more flexibility. So we're more likely than we were before in the next quarter or two to begin share repurchases absent other uses of organic deployment.

Perfect, thank you.

Your next question comes from the line of Jared Shaw with Barclays. Your line is open.

Hey, good morning, guys. Hey, Jared. You know, looking at maybe loan growth as we exit 24 going into 25, how much additional attrition or headwind should we expect from CRE? It sort of sounds like maybe not that much, but, you know, and should we expect or anticipate that maybe the overall loan growth rate starts to accelerate as we exit the year going into 25?

Yeah, I mean, it's a great question, right? Loan growth has clearly been muted for the industry in the last couple of quarters. We did have a really good quarter, you know, many core CNI categories. And I will say that that sort of pull through has continued early on in this quarter. Although we know that the fourth quarter is also subject to significant prepayments and there's a lot of activity, particularly on transactional sponsor and specialty deals. So that's why we didn't really change our guidance for the fourth quarter. You know, I think you've heard me say, and, you know, for 10 years or so, we've been able to kind of grow commercial categories in the high single digits to around 10%. I think right now our view of 25, Jared, is that, you know, we see there's continued kind of modest loan demand. So I think right now we think about next year as a %-ish kind of loan growth. You know, we're gonna give formal 25 guidance when we get into the January call. Could we outperform that? Sure, I think I've always said, I think we can kind of perform at or better than whatever the market allows. But, you know, I think if you read what others are saying and we look kind of at activity, I think 25, you know, may not be a blowout year, but be more modest and similar to this year with respect to loan growth. With respect to your question about mix and commercial real estate, you know, obviously we're really pleased this quarter and I think there's a bit of a template there for us. We had significant organic prepayments, which I know many others in the industry have reported over the last couple of quarters in Cree. And then we did this securitization, which actually was economically beneficial to us in terms of the gain on the transaction. And we look at that not as just trying to drive down Cree balances as much as we can, but it gives us capacity to support our really good clients in full relationships. We're really good at it. And so, you know, you will see some level of origination there and then at the end of the day, as we grow our capital base and we grow our other CNI classes, you know, you'll see either flat to modest growth overall in Cree with our ability to maybe exit non-strategic Cree relationships. But I think we showed this quarter, we can still grow loans at market while not relying on outsized Cree growth.

That's a great color, thanks. And then, Mary, for my follow up on the deposit side, really good trends there. As we're entering the enrollment season, what are your thoughts on maybe...

Yeah, hey, Jared, it's Luis. We feel good. What do you think that, you

know, there could be some pressures or opportunity?

Oh, hello, hey, Jared, it's Luis. So we do see, you know, we've seen pretty good early indicators that the enrollment season is gonna be, you know, as good as we've seen, you know, in the recent couple of years. So, you know, we've made a fair amount of investments in a bunch of client-facing technology. We launched the new investment management platform that you may have seen. We rolled out earlier this year. So we feel very good about the investments and how we positioned the, and continue to position the HSA business. And we think that you're gonna see similar to slightly, you know, more, you know, faster deposit growth than 2025 relative to what we saw this year. So we feel good about where HSA is today.

And Jared, as we usually do in January, we'll be able to give you a kind of a first look at new business and what we anticipate. And then obviously at the end of the first quarter, we kind of can final tally what's come in. But I agree with Luis. I think it was a good selling season for HSA.

Great, thanks a lot.

Thank you.

Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Your line is open.

Hey guys, good morning. Hey Mark. John, the Real Deal published an article late last week suggesting that you guys have two large office loans in New Jersey that are in default to the tune of about 140 million. I guess I'm wondering, are these on non-accrual in the third quarter? And do you have any, you know, specific reserves against them?

Thanks for the question, Mark. Yeah, so both of those loans, and let me make a couple of comments. Obviously with a $52 billion loan book, we don't generally comment on specific relationships, single point exposures, litigation, and so on and so forth. But obviously this has become a bit public. So what I will tell you is, the highlight numbers there are significantly overstate Webster's exposure. Those were two loans originated pre-merger. One has a Webster exposure under 45 million. The other one is Webster exposure under 25 million. Both of those loans are on non-accrual at the end of the third quarter. Both of those loans have obviously been reviewed and there have been the appropriate charge-offs and specific reserves put against those loans. As I mentioned in my early comments, two office loans drove the significant or not what the increase was in non-performers in the quarter. Those were the two loans. And you know, we took charge-offs that contributed to the overall $36 million charge in the quarter. So, you know, that's what I'll tell you. Office charge-offs were 55% of the charge-offs in our quarter. So you can kind of triangulate from there. But, you know, we're pretty good about making sure that we are proactively managing things, that things go non-performer when they're supposed to go and taking charges that we're supposed to take. And so, you know, the good thing about being a company our size right now is we've got significant earnings power. We've got, you know, a very high loan loss reserve compared to our peer median. And so this quarter, it really didn't have an impact on our overall financial performance. And we feel pretty good that we've got, you know, enough reserves in not only those two loans, but in our overall free portfolio that we continue to work down to not have there be a material financial impact as we move forward.

Okay, that's great. And then just as a follow-up, John, you guys have done a great job shrinking the office book. I guess I wondered if you could share with us what the reserve on the office portfolio is right now.

Yeah, I think it's up 6%, Mark. You know, I'll give you, again, I'll repeat what I said Jason had talked to me when the portfolio was a billion dollars a quarter or so ago. You know, we talked about there being about a third of that, which is kind of -to-hand combat that we're working through. These two credits that I just referenced and that you asked about were obviously in that, kind of third of difficult working through. We've got about a third of the portfolio that we don't worry about that's highly leased that has long dated maturities. And then the stuff in the middle, we continue to kind of just actively manage and we think we've got enough secondary and tertiary support as well as in-place leases to kind of work through. So when you think about 6% on the overall 917 million that's left, remember there are some specific reserves as well. And when you think about the reserving, we feel comfortable about it because it's really against that one third of the portfolio that's most problematic for us.

Thank you.

Thank you, Mark.

Your next question comes from the line of Matthew Brees with Stevens, your line is open.

Hey, good morning, everybody. And I was hoping you could talk a little bit about expectations around loan and deposit betas over the next year or so, whether you've had any early success tweaking and lowering deposit costs, if so where. And then the other side of the coin is just given over the quarters you've reduced asset sensitivity, whether or not you think full cycle loan beta will match what we've seen during the heightened cycle, which was kind of the low 50% range.

Yeah, I'll jump in there. I think obviously we had our first cut in the cycle of 50 basis points and we took pretty quick action on the deposit portfolio. And we repriced down 27, $28 billion of that portfolio of our deposit portfolio to about a 60% beta. So it's kind of 16 billion at 100% beta or if you look at our total book, about 25% beta so far. Our interlink deposits, basically 100% almost immediate beta and those are over $7 billion. We saw some nice pricing down in our commercial deposit portfolio, 60% beta so far on our online portfolio with Brio and in a bunch of different moves on our consumer portfolio through the first cut. So we're feeling pretty good there. And as you take a step back and look at our overall portfolio, within the next year, we expect approximately $30 billion of our loans and securities and cash to reprice. That's $28 billion in loans and $1 billion in securities. So our securities book is fixed and long with less than a billion out of our $17 billion portfolio there variable. So we kind of look at that as the repricing side on the loans. And if you flip to the deposit side, in the first five quarters of the up cycle, we saw 34% beta and we're anticipating approximately 30 basis, a beta of 30 in the first five quarters down. And if you think about a 30% beta on a $65 billion portfolio, you do the quick math there. That's about 19 to 20 billion at 100% beta. We have short borrowings, three billion or four billion will mature this quarter and next. We've got a $5 billion hedge portfolio that helps support our current positioning. And then there's another large factor for us is that we have approximately 5 billion of fixed rate securities that mature and turn annually. And those are anticipated to roll over, roll off at about 4% and roll back on with new originations and the 6% rate. So 200 basis points or so up. So when you kind of put all that together, we have a pretty well balanced position going into next year. And as you can see in our model results, a very neutral positioning despite us having a fairly large portion of variable rate load. So a long answer there, but I know it's an important topic and I think that the team has done a really good job positioning us for this downright environment.

I appreciate all that, thank you. And the follow up is just on expenses, expectations around expense growth over the next year or so specifically as it relates to preparation for 100 billion. Should we expect any acceleration in the coming quarters or year in expense growth as you get ready for this? And what areas do you expect to address as you kind of beef out an infrastructure?

And Matt, thank you for the question. And this may leave you a little wanting for more, but as we said, we're finishing up right now with PWC, our gap analysis and our plan for our March to Category 4. I always remind you that we're three to four years away from an organic growth perspective in hitting the $100 billion category. And as we mentioned before, there will be additional expense for us to get there in terms of hiring people and building out reporting capabilities and technology and obviously the expense of TLAC. And we're going through right now kind of the cadence of running that through. And our plan is, as I mentioned last quarter, that in January when we give our 25 guidance, that will include kind of our fully loaded assumptions about what that means for expenses. I also remind you that we have the three to four years to spread those expenses out and you heard Neil mentioned earlier, for example, that we took some charges on severance and reorganization in the quarter. And a lot of those moves in terms of exiting non-core businesses in looking at our organization will free up dollars to invest. So as we move forward, you're gonna get the answer to the question in January in our 25 guidance. We think that that will put additional pressure on our expenses, but it won't be material. We still feel very confident in our ability to deliver outsize returns as we go through this process. And so, Neil, I don't know if you wanna put a little bit of more flavor around that, but.

Yeah, I think you said that well, John. And one of my initial concerns coming into the organization was, hey, we're running at a 45% efficiency ratio. Are there really opportunities to find more efficiency? And as John mentioned, the team had done a nice job putting together a small program. And with the restructuring charges we took this quarter, we expect our expense run rate next year to drop $17 million, which won't flow all to the bottom line. We'll use some of those dollars to reinvest and prepare for category four. So I think it's an example of how we can continue to find efficiencies to pave our way to that kind of the requirements. And as John mentioned, we'll talk about specific numbers in Q1, but if you take a step back, we have a expense base that's just over $1.3 billion. So 1% of that is $13 million. If you add a percent to our expense growth rate over the next four years, that probably hits a good chunk of what we need to build. I'm not saying that that's what's gonna happen, but just kind of highlighting that it should be some incremental around the edges on the expense side versus a kind of a big pop-up of one-time expenses is the current view. But as John mentioned, we're not fully through the analysis on preparation, and we're making good progress there, and we'll give more details on Q1.

I appreciate all that, thank you. That's all I had. Thank you, Matt.

Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is open.

Thank you, good morning, everyone. I guess first, just a follow-up on the credit side. John, I think you mentioned an inflection in credit could lead to the possibility for increased repurchases going forward, but how should we think about that? Do you think that non-accruals are at or nearing a peak here? Obviously, there's some uncertainty with how the whole office loan environment plays out, but just curious how we should be thinking about those non-accrual and kind of early-stage credit levels and how that plays into your thinking on net charge-ups as well.

Yeah, it's a terrific question, and one that I loathe answering just because it is difficult to predict. We mentioned last quarter that this quarter would be less worse if you were, and we were marginally less worse. We've been through the entire portfolio. We are getting to a point where I think we've identified, obviously, all proactively, all the real issues in the portfolio that we go through. And I, again, remind everybody that if you look at our absolute statistics, they're kind of still in line with pre-pandemic statistics. So I know a lot of CEOs are saying, we're trying to remind everybody that this hasn't been a cratering of credit. It's been sort of a return to normalcy on credit. You know, our hope right now, and what we're looking at is we've got interest rates coming down. We've already seen an increase in commercial real estate refinancing activity based on the behavior of the five-year and the forward curve. And so as interest rates come down, if the Fed navigates this soft landing, I do think that we should see running through bank P&Ls and bank balance sheets an inflection point in credit, certainly in the first half of 25. It's tough to call a particular quarter. We have seen some negative risk rating migration. We've been pleased that that migration has not continued to result in higher levels of annualized charge-offs. And so it would be difficult for me to say, hey, we think four Qs at the bottom, but I do think all the macro factors and our understanding of our portfolio that the first half of 25, we should start to see kind of absolute improvement in the balance sheet. And obviously we have a forward look based on where we're trading. If you're asking the question with respect to capital allocation and return of capital, we've got lots of earnings. We've got really good reserves. So we'll put that all into the box and decide whether or not in the fourth quarter, we start buybacks or whether or not that's the first half of 25 activity.

Okay, terrific. Thanks for all that color. And then changing gears here, just looking at the loan growth side, you talked about how the fourth quarter could be impacted by some slower, perhaps C&I and sponsor with that, and what you mentioned specifically for prepayments. But just curious, the pace of growth in the third quarter, what you saw there, if that picked up near the end of the quarter, if it was relatively steady. And then just also curious on the residential side, expectations for how much you're gonna be adding to the portfolio relative to the other sides of the house.

Thanks. Yeah, our primary focus is continuing to grow a myriad of C&I categories. I would say that the loan behaviors in the third quarter, interestingly, that .3% growth, if you take out the securitization, it was sort of more back-ended, if you will, in the quarter, which gives us some momentum on NII as we go into Q4. And as I said, we've continued to see pull through early in the fourth quarter. The reason we didn't up the guidance is because we know there's a lot of activity, both on origination and prepayments in the quarter, and we don't really have full visibility yet. I think we still have pressure on our sponsor and specialty business from the proliferation of private credit. We're gonna have our asset manager program, hopefully up and running in the first quarter, which should give us some additional momentum there. Our middle market performed well, our public sector finance performed well. We've got other levers to pull in asset-based lending and in equipment finance. So I think with our portfolio, we'll continue to be able to grow C&I categories. You'll probably see some level, as Neil mentioned, of modest growth in commercial real estate, because right now, if you're good at it and you can get really nice risk reward because there are fewer players in the market. And then I think we'll sort of fill in with our mortgage originations, obviously serving our customers in our market, and then some level of correspondent mortgage origination. So I would say it's balanced and unbalanced. We still think that kind of 5%, if %-ish annualized loan growth is the right number.

Okay, great. Thanks for all that, Keller.

Your next question comes from the line of Bernard Von Gzicki with Deutsche Bank. Your line is open.

Hey guys, good morning. So on page six of the deck, you noted that you've identified and documented certain loans eligible to optimize RWA treatment. And I know you've been talking about this on the call, but just to elaborate a bit more on these actions and if you could size how big this was to capital improvement during the quarter.

Yeah, so I think all of our actions in total were about 44 basis points to the quarter. We really went in and did deep dives into our multifamily lender finance and public sector portfolios and looked at the risk weighting. And I'll give you an example, kind of in the public sector, we had a lot of loans sitting at 100% risk weighting and general obligation bonds can be at 20% and revenue pledge at 50%. So we did a lot of work to pull additional data and really optimize our risk weighting there. That's one example across the category. So hopefully that, and then as we mentioned, the securitization also helped drive increased capital levels and that was about six basis points included in that 44 that I just mentioned.

Okay, great, that's helpful.

Great.

And then on expenses, obviously with technology, you basically highlighted, you've been making significant investments in the tech stack, modernizing the core banking platform, the BSA ML, cybersecurity cloud capabilities. During the quarter, you also highlighted the tech spend increase sequentially, professional services and occupancy costs. Can you just provide some color on those for the quarter on the tech, professional and occupancy?

Specific, Bernard, your question being like specific expenses related to those initiatives for the quarter? Yeah, we don't really think about it that way. I think that this is, every year we look at a rolling three year technology roadmap and investment initiatives and everything that you highlighted there and that we've highlighted in the specific items that you were talking about are part of no long-term strategies that we've been deploying. So there's nothing really new there that we would isolate as something that's going to be recurring long-term in nature. Neil alluded to what we expect expenses are going to be and kind of what the progression of those are gonna be in the 2025 and that estimate of projection includes everything that we think is gonna be required to continue to modernize the tech stack, build out the tech stack, invest in the various business lines, invest in risk management platforms. And so, it's all inclusive when we provide that guidance for 2020. We don't envision that there's gonna be any outside, tech spend in 2025 relative to what you've seen this year. So we feel, again, we feel pretty good about what our long-term technology roadmap is and we have a clear path to making the investments in specific areas to support client experience while at the same time building out risk in operating platforms.

Okay, great. Thanks for taking my questions.

Thanks,

Bernard. Your next question comes from the line of Lori Hunsicker with Seaport. Your line is open.

Yeah, hi. Good morning, gentlemen and Neil, welcome. Thank you. Just to go back to Office here, and certainly I appreciate Office is only 2% of your book and you've been very proactive and transparent, but on your 54 million of loan loss provisions that you took this quarter, how much of that was Office? And then of the two loans that are new and non-performing, that 45 million and 25 million, can you help us think a little bit about, what is the occupancy? What's the new debt service there? And then specific reserves on those two loans, certainly under the backdrop that you gave Mark, Office reserves are 6% or 55 million. Basically of your 55 million, what are the specific reserves on those two loans? And then just sort of final question here on Office, on specifically that $45 million exposure that Bankwell just filed, they're a part of it. And you guys, it looks like for the lead, IE Sterling was the lead. Can you just help us think about, again, this is just per the Bankwell filing, that there was a refresh property appraisal done in April at 105 million and then five months later, that property is now worth 36 million. So if you could just help us think through any parts of that, that would be really helpful,

thanks. Yeah, Lori, I don't think, first of all, I don't have all of that information and I don't think I can give you very good answers there. I mean, I'll tell you with respect to Cecil and the provisioning for the quarter, there are so many in and outs, right? That you can't identify the amount of the provision related to a specific credit or even to a specific portfolio because what you're doing is refreshing and updating your risk ratings along with your qualitative factors and you're coming up with a refreshed life of loan losses for a $52 billion portfolio. So certainly the amount of charge-offs impacts what you provide, but it doesn't necessarily immediately correlate with where the charge-offs came from. So I don't think I can draw a connection to those two loans to our provision. I gave you the fact that the charge-offs in the quarter, about 55% of the charge-offs were related to office loans, those loans we mentioned being the largest drivers. We actually had debt recoveries in consumer, which offset our overall charge-offs a little bit. So again, it's tough to draw those conclusions. I certainly don't have the in-place debt service coverage and LTVs on those two specific loans now. What I can tell you from the CEO seat is that if they're on non-accrual, it means that there's a question as to whether or not the underlying cash flows can repay the loan as agreed. So we might be able to get you some of that offline with Emeline and Jason, but I can't give you the specifics on those two transactions. We were the lead lender. You're correct, it was, I think, a 2019 or 2018 origination, significantly pre-merger. So I can tell you that we were the agent on those two credits. And I think that's the information that I have available to me here,

Lori. Okay, okay. And then my follow-up question, just switching gears. When in the quarter did the securities restructuring occur? And then finally, do you have a September spot margin? Thanks for taking my questions.

I'll jump in with the September spot margin. So September was a little bit lower. We were about 3.31%. Loans came down eight basis points and deposits two basis points. I'll caveat that by saying monthly NIMS a little bit more variable than quarterly NIMS. I'll also say that September NIMS really represents our repricing dynamics. SOFR started moving down well before the Fed cuts, and there was obviously some lag there with our deposits repricing later with the cut coming in the middle of the month. We also started holding higher levels of cash in September. So since mid-September, as I mentioned before, we've taken significant action on our deposit costs, that 25% beta already, and we are confident that our Q4 NIM will come in above our September spot number. Yes, I think that that's it. And then the transaction there was kind of, it happened throughout the quarter, but probably weighted average more to the middle of the quarter. Thank you,

Lori. Your next question comes from the line of Samuel Vargas with UBS. Your line is open.

Hey, good morning. I just wanted to go back to the securities book, and you commented on the roll on yields being around 6% expected on the sort of the 5 billion of annual cash flows on that. Obviously, this quarter's was 584, so can you just comment on why this quarter was lower, why you expect it to move higher over the next 12 months?

Yeah, so on my comment on that 6%, that was more a mix of loans and securities, so kind of full fixed rate repricing. To your point, in this quarter, we added a billion dollars at 584. I think we're modeling 540 average for Q4, and our most recent purchase was kind of in between that 584 and 540. So feeling good about our numbers there, but just to clarify that, that 6% or that plus 200 basis points was the repricing of our fixed securities and loans. So that's why the numbers a little bit higher there.

Yeah, thanks for the clarification on that. And then on the Brio deposit base, you said the 60% beta, just to clarify as well, is that on the new production for this quarter, is that the overall book given the short duration of it that's already realized 60%?

Yeah, the 60% is on the overall portfolio.

Okay, and then, so in terms of new production, have you been able to get to near 100% or potentially over 100%?

Yeah, so I think before the cut and to where we're priced now, we're down 30 basis points, 50 basis points of the cut, and we're actively monitoring for potential additional moves. We've done, I think the team has done a really nice job of balancing liquidity versus earnings, and we've been very prudent in our moves, and you'll see more downward moves from us in the future as we've seen pretty good client reactions so far through the first cut that we've made.

Great, thanks for the feedback. Yeah, Sam, there's no real difference.

Sam, to answer you, there is no real, the portfolio is one rate on the portfolio. So new dollars versus the existing portfolio all, it's not that there's diverse product pricing in there, so the way to think about it is one overall beta for the portfolio, which is existing deposits plus new deposits are all getting originated. It's actually the same, the exact same yield, so the beta on both new and existing would be roughly the same.

Okay, thank you. Thank you,

Sam.

This concludes the question and answer session. I'll turn the call to John Sciola for closing remarks.

Thank you very much. We appreciate everyone joining today and your continued interest in the company. Have a great day.

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