Webster Financial Corporation (NYSE: NYSE:WBS) reported robust third-quarter results for 2024, with deposits growing 3.6% and loans increasing 0.7%, excluding a $300 million securitization aimed at reducing commercial real estate concentration.
Key Takeaways:
- Adjusted EPS of $1.34
- Return on average assets at 1.22%
- Total asset growth reached $79 billion
- Efficiency ratio maintained at 45%
- CET1 ratio exceeded 11% target
Company Outlook
- Anticipates loan growth of 1% to 1.5% in Q4
- Expects 1% decline in deposits due to seasonal factors
- Projects Q4 net interest income between $590 million and $600 million
- Forecasts 2025 loan growth around 5%
- Preparing for growth to $100 billion in assets over next 3-4 years
Bearish Highlights
- Non-accrual loans increased slightly
- Net charge-offs rose to $36 million from $33 million in previous quarter
- Two non-accrual loans with exposure under $45 million and $25 million
- Office loans accounted for 55% of charge-offs
Bullish Highlights
- Net interest income grew quarter over quarter
- CRE exposure as percentage of Tier-1 capital declined from 285% to 265%
- Significant improvements in capital ratios achieved
- High loan loss reserve compared to peers
- Expects improvement in credit quality by first half of 2025
Misses
- Cash flows from securities book slightly lower than expected at $5.84 billion
Q&A Highlights
- Clarified two pre-merger loans on non-accrual status
- Addressed $54 million loan loss provisions, with 55% attributed to office loans
- Discussed 60% beta on overall deposit portfolio
- Explained September spot margin of 3.31% and expectations for Q4 improvement
Webster Financial Corporation reported strong third-quarter results for 2024, with CEO John Ciulla and new CFO Neal Holland leading the discussion. The company saw a 3.6% growth in deposits and a 0.7% increase in loans, excluding a $300 million securitization aimed at reducing commercial real estate (CRE) concentration.
The bank successfully managed its diverse deposit base, with significant contributions from HSA Bank and commercial deposits. Total asset growth reached $79 billion, aided by a $2.2 billion increase in deposits, including a $1.1 billion rise in public funds. The efficiency ratio stood at 45%, maintaining an industry-leading position.
Despite challenges in the CRE sector, particularly in traditional office spaces, the overall credit quality remained stable. The company reported net charge-offs of $36 million for the quarter, up from $33 million in the previous quarter. The office portfolio maintains a reserve of 6%, with approximately $917 million remaining.
Looking forward, Webster Financial anticipates loan growth of 1% to 1.5% in Q4, with a potential 1% decline in deposits due to seasonal factors. Net interest income for Q4 is projected between $590 million and $600 million, factoring in anticipated rate cuts. The company expects loan growth for 2025 to be around 5%, with ongoing management of the commercial real estate portfolio.
The bank has made significant investments in technology and client-facing platforms to support future growth. It is preparing for anticipated growth to $100 billion in assets over the next 3-4 years, expecting to incur some additional costs for hiring and technology upgrades but anticipating an overall manageable expense growth.
Webster Financial maintains a positive outlook on credit quality, believing that the first half of 2025 may see an improvement driven by potential interest rate declines and increased refinancing activity. The company remains committed to prudent capital management, focusing on organic growth and potential acquisitions.
InvestingPro Insights
Webster Financial Corporation's (NYSE: WBS) strong third-quarter results are further supported by recent data from InvestingPro. The company's market capitalization stands at $9.3 billion, reflecting its substantial presence in the financial sector.
InvestingPro data shows that Webster Financial has a P/E ratio of 11.69, which is relatively low compared to industry averages, suggesting potential undervaluation. This aligns with the company's robust financial performance and growth prospects outlined in the earnings report.
One of the InvestingPro Tips highlights that Webster Financial has maintained dividend payments for 38 consecutive years. This impressive track record of consistent dividends underscores the company's financial stability and commitment to shareholder returns, which is particularly noteworthy given the challenges faced by the banking sector in recent years.
Another relevant InvestingPro Tip indicates that the stock is trading near its 52-week high. This information, coupled with the reported 13.35% one-week price total return and 15.94% one-month price total return, reflects strong investor confidence in Webster Financial's recent performance and future outlook.
The company's profitability is further emphasized by an InvestingPro Tip stating that Webster Financial has been profitable over the last twelve months. This is consistent with the reported adjusted EPS of $1.34 and the return on average assets of 1.22% mentioned in the earnings report.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 10 more InvestingPro Tips available for Webster Financial, providing a deeper understanding of the company's financial health and market position.
Full transcript - Webster Financial Corp (WBS) Q3 2024:
Operator: 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, Emlen Harmon to introduce the call. Mr. Harmon, please go ahead.
Emlen Harmon: Good morning. Before we begin our remarks, I want to remind you that the comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the Safe Harbor rules. Please review the forward-looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us. The presentation accompanying management's remarks can be found on the company's Investor Relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant ask just one question and one follow-up before returning to the queue. I will now turn the call over to Webster Financial CEO, and Chairman, John Ciulla.
John Ciulla: Thanks, Emlen. Good morning, and welcome to Webster Financial Corporation's third quarter 2024 earnings call. We appreciate you joining us this morning. I am very pleased to welcome Neal Holland as he is joining his first earnings call as Webster’s CFO. As we anticipated, Neal has hit the ground running since he officially swept into the role in mid-August and you can already see the impacts of some of the steps his team has taken to optimize the positioning of our balance sheet and grow interest income this quarter. Luis Massiani, 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 Neal to cover our financial results in greater detail. We are really pleased with our strategic and tactical accomplishments in the quarter. I’ll hit the highlights and Neal will provide more details. We grew deposits 3.6% in the quarter including growth in DDA, overall commercial deposits and HSA. We grew loans 0.7% in the quarter consistent with our full year growth expectations, excluding the $300 million securitization we performed to reduce our CRE concentration, our growth was 1.3% in the quarter with accelerating growth in C&I categories. We further reduced our CRE concentration through payoffs and reclassification of certain healthcare-related loans. As a result our CRE outstanding as 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 4 Q and beyond. Our expenses remained well managed resulting in the 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 2. On an adjusted basis for the quarter, we generated a return on average assets of 1.22% and a return on tangible common equity of 17.3%. Our adjusted EPS was a $1.34. Our profitability and return metrics remained favorable to peers again this quarter. At this point, most of you are familiar with Slide 3, which illustrates our diverse and versatile deposit base. As I mentioned upfront, 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 $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 4, I will review our commercial real estate portfolio as that has been a continued focus of investors. The segment of the CRE portfolio, on which we have been most focused continues to be traditional office. The portfolio balance continues to shrink with $917 million in outstanding at quarter end down, roughly 45% from the first half of 2022. We did see some continued negative migration in this quarter with non-accrual loan 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 multi-family portfolio or credit performance has held up consistently well. On credit more generally, we continued 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 CRE-office, negative migration was generally credit-specific across the portfolio and not driven by one industry, sector or asset class although healthcare-related portfolio's continue to show some weakness. While we've 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 Neal to cover our financials in more detail.
Neal Holland: Thanks, John, and good morning, everyone. I’ll start on Slide 5 with our GAAP and adjusted earnings for the quarter. On an adjusted basis, we reported net income to common shareholders of $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 banking operations; and a $22 million of strategic restructuring cost. Turning to Slide 6, total assets were $79 billion and 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 sequel surge in public funds of $1.1 billion. As a result of the substantial deposit growth, we are holding higher cash balances than we had 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 movements in AOCI due to the low rate environment. Capital levels improved significantly. The common equity Tier-1 ratio was 11.23% at 64 basis points quarter and our tangible common equity ratio was 7.48%. In addition to internal capital generation, the TCE ratio benefited from the improvement in AOCI, The common equity Tier-1 ratio also benefited from several actions we undertook to optimize asset risk weightings, as well as the securitization. In total, these actions added 44 basis points to our common equity Tier-1 ratio. Loan trends are highlighted on Slide 7. In total, loans were up $374 million or 0.7% linked quarter. Excluding CRE, other loan categories grew by 3.2% this quarter. Commercial real estate balances were down $570 million, as we experienced the natural attrition in addition to the securitization. This accelerates our path to our target 250% of capital plus reserves. The securitization creates capacity and adds and allows us to add commercial real estate relationships with attractive risk reward characteristics. Field on the portfolio is flat given the mix of new loan originations and repricing of floating rate loans on the September FED lifts. We provide additional details on Slide 8. 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 HAS 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 of DDA balances after several quarters of declines. Moving to Slide 9, net interest income was up $18 million from the prior quarter drive 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 provisions 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 or3.1% linked quarter, driven by balance sheet growth and the increase of earning asset yields. The net interest margin was up 4 basis points to 3.36. Our yield on earning assets increased 4 basis points over the prior quarter with loan yields flat and the securities portfolio up 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 earnback of less than two years. On net, we were able to maintain our total deposit costs effectively flat for the quarter. Slide 11 illustrates the progress Webster’s made in mitigating its assets 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 CDA and $4.4 million gain on the securitization. We continue to experience pressure on core fee growth. Year-over-year, fees are up $3 million, including the impact of the Ametros acquisition, offset by year-over-year changes in CDA. Non-interest expense is on Slide 13. We reported adjusted expenses of $328 million, up $2 million for 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 provisions 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 a continued migration of 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 outlook for the fourth quarter. We expect loans to grow by 1% to 1.5% with growth across the diverse categories, including the potential for some modest growth in commercial real estate. We are anticipating deposits will decline by around 1% as seasonality in the public funds leads to outflows. We expect net interest income in the range of $590 million 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 million 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-1 ratio remains 11%. With that. I’ll turn it back to John for closing remarks.
John Ciulla: Thanks, Neal. 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 Neal 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 the 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 cyber security 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.
Operator: [Operator Instructions] Your first question comes from the line of Chris McGratty with KBW. Your line is open.
Chris McGratty: Hey, good morning.
John Ciulla: Good morning, Chris.
Chris McGratty: Maybe, John or Neal, 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 freed up a little bit of space on the balance sheet, yeah, maybe I’ll me leave it there.
John Ciulla: Yeah, so, we came in at 3:36 for the quarter. Kind of as you look at how we exited Q3, we're going to be able to be a little bit more cash on the balance sheet. Within Q4 we will have a slight drag in NIM. So we are kind of in the Q4 going to be in 3:32 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 plus or minus three basis points as we move forward. But that’s the range we are looking at going forward into ‘25.
Chris McGratty: 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 what you think you might be able to return more capital?
John Ciulla: Yeah, I mean, I think, 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 and 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.
Chris McGratty: Perfect. Thank you.
Operator: Your next question comes from the line of Jared Shaw with Barclays (LON:BARC). Your line is open.
Jared Shaw: Hey, good morning, guys.
John Ciulla: Hey Jared.
Jared Shaw: Looking at maybe long growth as we exit ’24 going into ’25, how much additional attrition or headwind should we expect from CRE. It sounds like maybe not that much, but and should we expect or anticipate that maybe the overall loan growth rate start to accelerate as we exit the year going into ‘25?
John Ciulla: 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, many core C&I categories and I will say that that sort of pulls through that 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 sponsored specialty deals. So that's why we didn't really change our guidance for the fourth quarter. I think you heard me say and 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, we see there's continued kind of modest loan demand. So I think right now, we think about next year, as a 5%-ish kind of loan growth, we're going to give formal ‘25 guidance when we get into the January call. Could we outperform that? Sure. I think I’ve always said I think we can kind of perform at or better than whatever the market allows. But I think if you read what others are saying and we will kind of add activity, I think ‘25, 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 in commercial real estate, 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 CRE. And then we did the 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 CRE balances as much as we can but it gives us capacity to support our really good clients and in full relationships. We are really good at it. And so, you will see some level of origination there and then at the end of the day as we grow our capital base and we grow our other C&I classes, you will see either flat to modest growth overall in CRE with our ability to maybe exit non-strategic CRE relationships. But I think we showed this quarter, we can still grow loans at market, while not relying on outsized CRE growth.
Jared Shaw: That’s great color. And then maybe 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 what are your thoughts on maybe [Audio Gap].
John Ciulla: We feel good…
Jared Shaw: Or do you think that there could be some pressures or opportunity?
John Ciulla: Hey, Jared, please. So we do see, we've seen pretty good early indicators that the enrolment season is going to be as good as we’ve seen in the recent couple of years. So, now we’ve made a fair amount of investments in a bunch of client-facing technology. We launched the new investment management platform. You may have seen, we rolled out [Indiscernible] this year. So we feel very good about the investments and how we positioned. We have been continuing to position the HSA business and we think that you're going to see similar to slightly more faster deposit growth in 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 will 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 I think though, at least I think it was a good selling season for HSA.
Jared Shaw: Great. Thanks a lot.
John Ciulla: Thank you.
Operator: Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Your line is open.
Mark Fitzgibbon: Hey guys. Good morning.
John Ciulla: Hey, Mark.
Mark Fitzgibbon: So on 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 no-accrual in the third quarter? And do you have any specific reserves against them?
John Ciulla: Thanks for the question, Mark. Yeah, so, both of those loans - and let me make a couple 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 that what the increase was in non-performers in the quarter. Those were the two loans and we took charge-offs that that contributed to the overall $36 million charge in the quarter. So 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, 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 were supposed to take. And so, the good thing about being a company our size right now is we've got significant earnings power. We've got 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, enough reserves in, not only those two loans, but in our overall CRE portfolio that we continue to work down to not have there be a material financial impact as we move forward.
Mark Fitzgibbon: Okay. That's great. And then just as a follow-up, John, you guys have done a great job shrinking the office book, I guess, I wondered if you could share with us what the reserve on the office portfolio is right now.
John Ciulla: Yeah, I think it's at 6%. Mark, I'll give you, again. I'll repeat what, I’ve said Jason met and talked to me when that portfolio was a billion dollars a quarter or so ago. We talked about there being about a third of that which is kind of hand to hand combat that we're working through these two credits that 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 you know, in place leases to kind of work through. So, when you think about 6% on the overall $917 million that's left, remember there are some specific reserves as well. And when you think about the reserving, we feel comfortable about it because it's really against that one-third of the portfolio that's most problematic for us.
Mark Fitzgibbon: Thank you.
John Ciulla: Thank you, Mark.
Operator: Next question comes from the line of Matthew Breese with Stephens. Your line is open.
Matthew Breese: Hey, good morning everybody.
John Ciulla: Hey, Matt.
Matthew Breese: I was hoping you could talk a little bit about expectations around loans and deposit betas, over the next year or so. Whether or not 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 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 in the low 50%.
John Ciulla: Yeah, I I'll jump in there. I think, obviously, we had our first cut in the cycle, 50 basis points and we took pretty quick action on the deposit portfolio. And we've re-priced down $27 billion, $28 billion of that portfolio at about – of our deposit portfolio is about a 60% beta. So, it’s kind of $15 billion at a 100% beta or if you look at our total book about 25% beta so far. And our interlinked deposits basically 100% almost immediate beta and those are over $7 billion. We cut the nice pricing down in our commercial deposit portfolio. Now the 60% beta so far on our online portfolio with BRIO [Ph] and then a bunch of different moves at our consumer portfolio through the first cut. So we're feeling pretty good there. And, as you take a step back and take a look at our overall portfolio, within the next year, we expect approximately $30 billion of our loans and securities and cash to reprice. In that's $28 of loans and $1 billion in securities. So our securities book is fixed in loans with less than a $1 billion out of our $17 billion portfolio with variables. 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 upcycle, we’ve got 34% beta and we are anticipating approximately 30 basis – 30 – beta of 30 in the first five quarters down. And if you think about a 30% beta on the $55 billion portfolio, you did a quick math there. And that’s about $19 billion to $20 billion and a 100% beta. We have short borrowings, $3 billion or $4 billion will mature this quarter and next. We've got a $5 billion hedged portfolio that help support our current positioning. And then, there is another large factor for us is that, we have approximately $5 billion of fixed rate securities that mature annually. And those are anticipated to roll over, roll off at about 4% and roll back on with new originations in the 6% range. So the 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 of having a fairly large portion of variable rate loans. So, it’s 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 the down rate environment.
Matthew Breese: 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 to come in quarters or year in expense growth as you get ready for this? And what areas do you expect to address as you kind of beat out the infrastructure? Thank you.
John Ciulla: Yeah, 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 GAAP analysis and our plan for our march to Category 4. I always remind you that we're 3 to 4 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 a cadence of running that through and our plan is, as I mentioned in the 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 Neal mention 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 going to get the answer to the question in January in our ‘25 guidance. We think that that will put additional pressure on our expenses, but it won't be material. We still feel very confident in our ability to deliver outsized returns as we go through this process. And so, I don't know if you want to put a little bit of more flavor around that but…
Neal Holland: Yeah, I think you said that will John, one of my initial concern is coming into the organization let's say we're running at a 45% efficiency ratio. Are there really opportunities to find more efficiency. And as John mentioned, the team has done a nice job putting together a small program and with the restructuring charges we took this quarter, we expect our expense runrate next year to drop $17 million, which won’t flow off to the bottom-line. We’ll use some of those dollars to reinvest and prepare for category for us. 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 of just over $1.3 billion. The 1% of that is, $13 million. If you add a percent to our expense growth rate over the next four years that probably hit the good chunk of what we need to build. I am not saying that that’s what’s going to happen, but just kind of highlighting that it should be some incremental around the edges on the expense side versus kind of a big pop up of one-time expenses as the current yield. But as John mentioned, we are not fully through the analysis of preparation and we are making good progress there and we will give more details on Q1.
Matthew Breese: I appreciate all that. Thank you. That’s all I had.
John Ciulla: Thank you, Matt.
Operator: Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is open.
Daniel Tamayo: Thank you. Good morning, everyone.
John Ciulla: Good morning.
Daniel Tamayo: 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 that non-accruals are at or nearing a peak here? Obviously, there's some uncertainty with how the losses in 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-offs, as well?
John Ciulla: Yeah, it's a terrific question and one that I love answering just because it's - it is difficult to predict. We mentioned in the 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 - 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 are trying to remind everybody that this hasn't been a cratering of credit. It's been sort of a return to normalcy on credit. 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 5-year and the, the forward curve. And so, as interest rates, come down if the FED navigates this soft landing, I do think that, we should see a 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 4Q is 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 the 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, 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 a first half of ‘25 activity.
Daniel Tamayo: Okay, terrific. Thanks for all that color. And then and then changing gears here, just looking at loan growth, the loan growth side ,you talked about how the fourth quarter could be impacted by some slower perhaps C&I and sponsor with the with the headwinds you mentioned specifically for prepayments. But just curious, the pace of growth in the third quarter, what you saw there that, if that picked up near the end of the quarter if it was relatively steady and then just all curious on the residential side expectations for how much you are going to be adding to the portfolio relative to the other side of that? Thanks.
John Ciulla: 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 1.3% growth, if you take out the securitization, it was sort of, more back-ended if you will in the quarter, which gives us some momentum on NII as we go into Q4. And as I said, we’ve continued to see pull through in the – early in the fourth quarter. The reason we didn't up the guidance is because we know there is 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 going to have our asset manager program hopefully up and running in the first quarter, which should give us some additional momentum there. Our middle market performed well. Our public sector finance performed well. We've got other levers to pull in at the base lending and in equipment finance. So, I think with our portfolio we will continue to be able to grow C&I categories. You’ll probably see some level as Neal mentioned a 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 on balance. We still think that kind of 5% - if 5%-ish annualized loan growth is the right number.
Daniel Tamayo: Okay, great. Thanks for all that color.
Operator: Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank (ETR:DBKGn). Your line is open.
Bernard Von Gizycki: Hey guys, good morning. So on Page 6 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 the capital improvement during the quarter?
John Ciulla: Yeah. So, I think all of our actions in total were about 44 basis points for the quarter. We really went in and did deep dives in our multi-family lender finance and public sector portfolios and looked at the risk weighting. And I’ll give you an example of kind of in the public sector, we had a lot of loans sitting at a 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. So that’s one example across the categories. So, hopefully that and then the – as we mentioned the securitization also helped drive increased capital levels and that was about 6 basis points included in that 44 that I just mentioned.
Bernard Von Gizycki: Okay. Great. That was helpful.
John Ciulla: Great.
Bernard Von Gizycki: 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/AML cyber security cloud capabilities. During the quarter, you also highlighted the tech spend increased sequentially. The professional services and occupancy cost. Could you just provide some color on those for the quarter on the tech, professional and occupancy?
John Ciulla: Specific – Bernard, your question being like specific expenses related to those initiatives for the quarter. Does that,,,
Bernard Von Gizycki: Yes.
John Ciulla: Yeah, we don't really think about it that way. I think that this is that we every year we look at a rolling three year technology roadmap and investment initiatives and everything that you highlighted there that we highlighted in the specific items that you are talking about are part of long strategy 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. Neal alluded to what we expect expenses are going to be and kind of what the progression of those are going to be in the 2025 and all – that estimate of projection includes everything that we think is going to be required to continue to modernize the tech stack build up, the tech stack investment bonds, investment risk management platforms. And so all – it’s all inclusive when we provide that guidance of 2025 and we don’t envision that there is going to be any outsized tech spend in 2025 relative to what you’ve seen this year. So we feel – again we feel pretty good about where the long term technology roadmap is and we are having clear path to making the investments at specific areas to support client experience while at the same time building out risk in operating platforms.
Bernard Von Gizycki: Okay. Great. Thanks for taking my questions.
Neal Holland: Thanks, Bernard,
Operator: Your next question comes from the line of Laurie Hunsicker with Seaport. Your line is open.
Laurie Hunsicker: Yeah. Hi. Good morning, gentlemen and Neal welcome.
Neal Holland: Thank you.
Laurie Hunsicker: Just to go back to office here and certainly appreciate office, there 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 or 6% or $55 million basically. Of your $55 million, what are the specific reserves on those two loans? And then, just sort of final question here on office specifically that that $45 million exposure the bank well just filed their part of it and you guys it looks like where the lead i.e., Sterling was the lead. Can you just help us think about, again, this is just per the bank well filing that there was a refresh property appraisal done in April at $105 million and then five months later that property is now worth $36 million. So, if you could just help us think through any parts of that that would be really helpful. Thanks.
John Ciulla: Yeah, Laurie, 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 CECL and the provisioning for the quarter, there are so many in and outs right, that that there's 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 weightings 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 correlates 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 struck – have to draw those conclusions. I certainly don't have the in-place debt service coverage in LTVs on those two specific loans now what I can tell you from the CEO seat is that if there are non-accruals, 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 gauge some of that offline with Emlen and Jason. But I can’t give you the specifics on those two transactions. We were the lead lender. You're correct. It was a - 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, Laurie.
Laurie Hunsicker: 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.
John Ciulla: Yeah, I'll jump in with the September spot margin. So, September was a little bit lower. We were about 3.31%. Loans came down 8 basis points, and deposits 2 basis points. I’ll caveat that by saying monthly NIM is a little bit more variable than quarterly NIM. I’ll also say that September NIM really represents our repricing dynamics. SOFR started moving down well before the FED cuts and there was obviously some lags 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 cost the 25% beta already. And we are confident that our Q4 NIM will come in above our September spot number. Yes, I think 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.
Neal Holland: Thank you, Laurie.
Operator: Your next question comes from the line of Samuel Varga with UBS. Your line is open.
Samuel Varga: Hey, good morning. Just wanted to go back to the securities book and I know you commented on the role on yields being around 6% expected on the sort of the $5 billion of annual cash flows on that. Obviously this quarter it was $5.84 billion. So can you just comment on why this quarter was lower? Why you expect it to move higher over the next 12 months?
Neal Holland: Yeah. So, my comment to that 6% that was more a mix of loans and securities that’s kind of full fixed rate repricing. To your point, in this quarter, we added $1 billion to $5.84 billion. I think we are modelling $5.40 billion average for Q4 and our most recent purchase was kind of in between that $5.84 billion and $5.40 billion. So, feeling good about the numbers there. But just to clarify that that 6% of that plus 200 basis points was the repricing of our fixed securities and loans. So that’s why the number is a little bit higher there.
Samuel Varga: Got it. 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 that’s already realized 60%?
John Ciulla: Yeah, the 60% on the overall portfolio.
Samuel Varga: Okay, and then and then, so, in terms of new production and have you been able to get to near 100% or potentially over 100%?
John Ciulla: Yeah, so, I think before the cuts and to where we're priced now, we're down 30 basis points, down that 50 basis point of the cut, and we're actively monitoring for potential and 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 made.
Samuel Varga: Good.
Neal Holland: There is no difference. Sam, the portfolio is one rate on the portfolio. So [Audio gap] dollars versus the existing portfolio all, there is not a diverse product pricing in there. So, the way to think about it is one overall beta for the portfolio which is existing deposits, what’s new deposits are all getting originated at rate. We are able to essentially saying exactly the yields so the beta on both new and existing would be roughly the same.
Samuel Varga: Got it. Thank you.
John Ciulla: Thank you, Sam.
Operator: This concludes the question and answer session, I'll turn the call to John Ciulla for closing remarks.
John Ciulla: Thank you very much. We appreciate everyone joining today and your continued interest in the company. Have a great day.
Operator: This concludes today's conference. We thank you for joining. You may now disconnect your lines.
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