Brody Preston: Got it. And then the last one for me. I just wanted to ask her on the HSA book. I feel like this has been a topic that’s come up sporadically over the last several years. But I wanted to ask just because other banks are looking to potentially monetize unique assets that they have. And so when I look at kind of what’s happened in HSA, it feels like some of your nonbank competitors have been able to really kind of pay really high multiples to acquire other HSA portfolios that otherwise I think if they had the same investor base that you do, they wouldn’t be able to pay as much. And so with the growth in that business line kind of slowing to some extent and the value of it really not showing up in the multiple and it’d be tough to kind of inorganically grow that business, just given that you’re treated like a bank versus others that are treated like nonbanks like how do you think about maybe monetizing that and doing something more strategic there to help your investors realize the full value of that business?
John Ciulla: That’s a great question. And I think all of your observations in general are correct, and we’ve talked about it over time. The basic premise for us is that we have a very efficient way to deploy long-duration, low-cost deposits as a bank that really help profitability for us. And while the market has slowed, if you look at it, you’re still growing deposits at very low costs in the mid to high single-digits. And there aren’t many channels that are doing that. So and we are continuing to grow along with the market on an organic basis. So I take your point in terms of the inorganic growth of some of the other top five players. So it is very valuable to us. It helps us generate the kind of returns and profitability we have, albeit it’s a smaller part of the whole after the MOE.
We are frustrated that the market doesn’t recognize the value that we’re still building in that business as part of the bank. And as you know, we continue and we talk about it all the time to evaluate HSA in the bank and the value it has in the bank outside of the bank because we have an obligation to make sure that we’re making the best decisions for our shareholders as we move forward. And so up until now, it’s continued, particularly in this interest rate environment, it’s pretty easy for us to say operating HSA as a division of our bank creates the most value for our shareholders in the long term in terms of the quality and the value of the cash flows. We don’t think the market where we’re trading at a seven-times multiple on future earnings is reflecting that unique company and business, and we want to continue to keep informing people and educating people about where we are.
We were able to execute on the Bend transaction last year, which gave us higher levels of user experience and a better mousetrap, if you will, and I think it’s helped us compete in the marketplace. We are still looking every time there’s a deal in the market of another portfolio because the market keeps consolidating. I think the top 10 now represent 83% of the market. We’ll try and be in a participant in that. But I think it’s going to be a continued evaluation for us, and we’ll make the right decision on where HSA belongs given the value we can create owning it or the value that it would receive as a different company or a company that was part of a joint venture or somewhere else outside the bank.
Brody Preston: Great. Thank you for taking my questions, everyone. I appreciate it.
Operator: Your next question comes from the line of Daniel Tamayo of Raymond James. Your line is open.
Daniel Tamayo: Good morning, everyone. Thanks for taking my question. Maybe just starting in the decline in the commercial industrial, commercial loan areas. I know you talked about deemphasizing some asset classes there. Just give a little more detail on where you were pulling back, and I apologize I jumped on a little late if you already covered that.
John Ciulla: No, that’s quite all right. It’s a good question, and we haven’t covered it in detail. So the decline across the board on the C&I side was generally driven by — when we had mortgage warehouse obviously down. And I think you’ll likely can see that continuing to reduce from a strategic perspective. We’re very careful on transaction-only ABL and equipment finance in the quarter since the crisis in March. And so those did grow rapidly and may have had small declines. Our fund banking activity, which high-quality fund banking loans, equity subscription lines to private equity firms was down about $0.5 billion, and that was driven by one big payoff and then just lower utilization. Our overall middle market C&I utilization on lines after kind of holding steady for several quarters at 50% was down into the mid-40s.
So we did see seasonally lower usage. And I don’t know what that portends in terms of client confidence or anything, but utilization was lower as well. So that kind of drove the quarter results some of it was us pulling back on levers. Some of it was a seasonally slow third quarter, more sluggish loan growth, and that’s where we ended up. I think as you go forward, we’ve talked about really making sure that we have the liquidity capacity, the loan-to-deposit ratio and the capital to grow those full relationships across our middle market businesses, our other ancillary C&I businesses, sponsor and specialty, non-office commercial real estate. We are seeing some level of increased demand as we move into the fourth quarter, our pipeline is up about $0.5 billion.
So I think you think we’ll make — we’ll continue to see mortgage warehouse run down. There may be a couple of other small subscale businesses where we won’t be generating the kind of loan growth that we’ve generated in the past, but we think we can offset that with our core franchise building loan generation.
Daniel Tamayo: Terrific. And then on the flip side, the commercial classified loans were up both on an absolute basis and as a percentage of that portfolio. Maybe you could talk a little bit about what drove that increase?
John Ciulla: Sure, happy to. First of all, I didn’t say up in my front comments, but I did reference that, that level of classified at 1.74% of a smaller portfolio in the quarter is actually 100 basis points lower than Webster’s classified percentage in the fourth quarter of 2019 before the pandemic. So just a reminder, again, that we’ve been — the entire industry has been benefiting from really, really favorable credit metrics, and this is just a small step, I think, towards a more normalized rate going forward. But in terms of the actual contributions there, there weren’t any kind of correlations across geography, asset class business line. We saw some C&I in health care. We had a small portion in ABL. We had some office migration that we talked about prior and then just generally across the other C&I categories.
So it really wasn’t — we didn’t see correlated risk. We just saw credit-specific migration as part of our overall modest negative risk rating migration in the portfolio.
Daniel Tamayo: Okay. Terrific. And lastly just one for Glenn on the hedging strategy. And how you expect the net interest income would react to rate cuts if they do materialize next year?
Glenn MacInnes: Yes. So, Daniel, good morning. We did talk a little about that as we look — we’re not providing an outlook for 2024 at this point. The point I made earlier is that I think our NIM will continue to be supported into the fourth quarter and into the next couple of quarters through the benefit of both fixed rate loans repricing, investment securities repricing as well as the periodic loans repricing. Some of that will be obviously offset by deposit cost and our thinking on where the cumulative deposit beta will end up. But I think generally, that’s how we’re feeling going into the next couple of quarters.
