Q2 2021 Webster Financial Corp Earnings Call
Good morning, and welcome.
Webster financial corporations second quarter 2021 earnings call on.
Now introduce Webster's director of Investor Relations Christian please.
Please go ahead ma'am.
Thank you Melissa good morning, and welcome earlier. This morning, we issued a press release to announce Webster financial corporations second quarter 2021 earnings on the call today, we will provide some brief comments regarding the company's second quarter earnings.
Today's presentation slides have been posted on the company's Investor Relations website before we begin our remarks I want to remind you that the comments made by management may include forward looking statements within the 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 on.
Now introduce Webster's chairman and CEO John for you. Thanks.
Thanks, Kristen good morning, and thank you for joining Webster's second quarter earnings call CFO, Glenn Macinnes and I are here in Waterbury and will review the business financial and credit performance for the quarter. I'll also provide a brief update on our partnership with Sterling at the end of our presentation, Glenn and I will be happy to take your questions.
While some uncertainties related to the virus remain data is positive in the northeast and we remain optimistic about the positive economic and social activity trends across our footprint. We continue to forecast more robust economic activity in the second half of 2021, but we're always prepared for the path of the virus taken unexpected turn.
The second quarter of 2021 was a terrific quarter for this company on all fronts, our financial performance was solid including strong loan growth positive credit metrics and continued expense management, we are executing on the strategic initiatives from our comprehensive organizational review delivering incremental revenue and making significant progress.
Towards our fourth quarter 2021 cost savings target and lastly, the Sterling merger integration planning and design has gone very well since announcing our partnership in April we are confident in our ability to deliver on the financial metrics previously disclosed as we build a powerhouse northeast banking franchise.
Starting on slide 2.
We delivered strong business performance in the quarter, excluding PPP, we grew loans by 3% or 12% annualized was $2.3 billion in total loan originations transactional and total deposits continue to grow and we enter the second half of the year with increasingly favorable and strong credit capital and liquidity.
Positions.
Our adjusted earnings per share in Q2.
21 up from 57, a year ago, our second quarter performance includes $18 million of pre tax charges related to the merger and our strategic initiatives Glenn will provide additional perspective on these charges during his remarks.
An improved economic outlook, along with favorable asset quality supported a $21.5 million seasonal allowance release in the quarter, our second quarter adjusted return on common equity was nearly 14% and adjusted return on tangible common equity was 17%.
Turning to slide 3.
Reported loans grew 8% linked quarter or 3.2% when you exclude PPP loans PPP loans decreased $462 million as a result of net forgiveness activity in the quarter.
Excluding those PPP loans commercial loans grew 3.8% more than $500 million from prior quarter and were up almost 4% from a year ago. This was a very strong quarter for commercial banking with $1.6 billion of loan originations.
Thirdly from Q1, and a year ago, when excluding PPP loan fundings of $1 billion doubled Q1, when we exclude the PPP loans in commercial banking, we continue to benefit from our industry expertise and deep relationships across all chosen sectors in this quarter commercial loan growth was driven primarily.
Merrily by growth across our entire middle market franchise, and sponsor and specialty verticals consumer.
Consumer loans grew 1.9% or $120 million from first quarter and declined 5.7% compared to prior year the linked quarter increase reflected seasonally strong purchase mortgage activity during the traditional home buying season.
Overall residential mortgage activities drove $800 million of consumer loan originations up solidly from Q1 and from a year ago.
I'm now on slide for deposits grew 9.5% year over year, while deposit costs continue to decline and were 7 basis points in the quarter.
<unk> bank deposits are up more than 14% from a year ago, resulting from municipalities and excess liquidity among clients across all lines of business and all geographies retail.
Retail banking deposits grew 7.2% year over year with consumer and small business deposits growing 5.8% and 16, 7%, respectively retail deposit costs continued to decline and totaled just 7 basis points in the quarter.
We see more positive trends on our HSA business as we begin to return to pre pandemic business activity levels for new account openings were 17% higher from the prior year, driven primarily by a rebound in our existing direct to employer business. Overall core accounts grew 3.3% year over year with strong core deposit balance.
<unk> of 11, 8%.
Total footings grew 19% year over year supported by growth in investment balances.
Interchange revenue and HSA was up 28% year over year as consumer spending on health care has returned to pre pandemic levels in the quarter a trend we see as a positive sign for our business overall.
HSA deposit costs were 9 basis points down 6 basis points on a year over year basis as we remain disciplined in this low interest rate environment.
I'd also like to note in the quarter that Tpa accounts and balances declined 38000, and $120 million, respectively compared to the first quarter. These tpa Tpa accounts, which we disclosed previously continue to attrite at a slower pace than originally anticipated.
Moving to slide 5 I'll provide an update on the integration process related to the merger.
As shared on the call in April this combination drives diversification scale and unlock significant revenue growth opportunities across our differentiated commercial businesses health savings and consumer banking businesses.
Working closely together with Jackup minsky and bankers across both organizations, we continue to reaffirm the complementary nature of our companies from our business and culture standpoint, we remain focused on using the elements of both companies' business attributes and cultures to build a distinctive and results oriented organization.
We have begun executing on executing on a comprehensive integration plan guided by 4 overarching strategic principles, 1 value creation by delivering on the merger economics, we set forth in April.
2 customer first by focusing on client engagement and retention of customers and clients through the process.
Conversion and continuity by leveraging a positive and forward thinking integration mentality and for risk mitigation by managing execution risk and delivering on our robust risk management framework.
We've established an integration office and named leaders to government work streams and manage integration planning activities across all business lines and functions.
We are leveraging the appropriate internal and external resources to ensure a successful integration.
As shown on the timeline, we achieved several key milestones, including naming our executive team the regulatory approval process remains on track and our shareholder meeting related to the merger will occur on August 17th we continue to expect the transaction to close early in the fourth quarter. We're.
We're making significant progress on this combination and I can tell you that the Webster team is even more excited about this combination today than we were on the announcement date Webster on Sterling are individually strong performers and together we are creating a differentiated best in class commercial banking powerhouse.
We've outlined the strong value, we're creating for our shareholders and we know there is tangible and material revenue upside as we get to legal day, 1 and begin to deliver for our clients and customers across the broader geography geographic footprint with that I'll turn it over to Glenn for the financial review in more details.
Thanks, John I'll focus on key aspects of performance in the quarter, which included strong loan growth improved credit performance and further progress on our strategic initiatives I'll.
I'll begin with our average balance sheet on slide 6 average.
Average securities declined $55 million or less than 1% linked quarter.
<unk> represented 26% of total assets at June 30th.
During the quarter, we purchased approximately $600 million of securities with a yield of 159% and a weighted duration of 5 years securities called matured or paid down totaled around $500 million with a yield of 2.4%.
Average excess liquidity being held at the fed totaled $1.3 billion and increased $590 million on average linked quarter.
This was driven by an increase in consumer and commercial transactional deposits.
Average loans declined $68 million or 3% linked quarter, primarily driven by a $163 million and lower PPP loans.
During the quarter forgiveness on PPP loans totaled $532 million in.
In Q2, we recognized $10.6 million of PPP deferred accretion and the remaining deferred fee balance totaled 31 million at June 30th.
Excluding PPP average commercial loans grew $161 million or 1, 2%, while consumer loans declined $66 million or 1%.
While average loans declined period end loans adjusted for PPP forgiveness grew by $636 million or 3.2%.
The growth reflects a 26% increase in total originations from the prior quarter driven by higher commercial real estate and residential mortgage activity.
Average deposits grew 446 million or 1.6% linked quarter.
The increase was driven by consumer and commercial transactional deposit products, resulting from government stimulus payments round, 2 PPP loans fundings and customer liquidity.
The growth in transactional deposits was partially offset by a decline in higher cost Cds.
Average borrowings declined by $21 million from Q1 borrowings represented 3.6% of total assets at June 30, compared to 9.2% a year ago.
The loan to deposit ratio was 74% at June 30th.
The common equity tier 1 ratio decreased 24 basis points linked quarter to 11, 6% to 5% driven by the increase in commercial and residential loans.
Our tangible common equity ratio increased to $7, 91% and would be 21 basis points higher excluding $800 million and zero percent risk weighted PPP loans.
Tangible book value grew 2% linked quarter and 5.8% from prior year.
Slide 7 highlights our GAAP performance in adjustments to reported income available to common.
During the quarter, we recognized $16.8 million of after tax charges related to the merger and another 800000 from our strategic initiatives.
On an adjusted basis income available to common was $109 million or $1.21 per share, resulting in a 13, 9% return on average common equity and a 17% return on tangible common equity.
On slide 8 we provide our reported to adjusted income statement net interest income declined by $3 million linked quarter, reflecting a quarter over quarter decline of $5 million and PTT fee accretion, partially offset by lower funding costs of $1 million and 1 additional calendar day.
NIM of 282% declined 10 basis points from prior quarter split between lower PPP fees and increased liquidity held at this debt.
As compared to prior year net interest income declined by $3.6 million. This was the result of lower market rates, which reduced net interest income by $21 million and was partially offset by $17 million on lower deposit and borrowing costs.
Noninterest income decreased $4 million linked quarter, primarily driven by fair value adjustments of $5 million on customer derivatives.
Due to the decline in forward interest rate curves and lower mortgage banking fees.
Partially offset by higher deposit service fees.
Per the prior year non interest income grew by $12.6 million.
This reflects an increase of $5.6 million in deposit service fees, driven by Hyatt higher debit transaction volume up 33% in HSA bank and 15% in the retail bank.
In addition, noninterest income growth included the fair value adjustments on our customer derivatives higher wealth and HSA fee income, partially offset by lower mortgage banking revenue.
Adjusted noninterest expense declined $9.9 million from prior quarter reflective of continued progress on our strategic initiatives, which I'll discuss on an upcoming slide.
Versus prior year non interest expense declined $7.8 million due to lower compensation and benefits occupancy costs professional service fees and deposit insurance.
Pre provision net revenue of $125 million in pre provision revenue was 125 million in Q2. This compares to a $122 million in Q1 and $108 million in prior year.
Our seasonal provision in the quarter reflects a benefit of $21.5 million, which I'll discuss later in more detail.
The adjusted tax rate was 23, 7% on increase of 160.156 basis points linked quarter, driven by an increase in estimated taxable income and a decrease in excess tax benefits.
The net result is an adjusted net income of $109 million or $1.21 per share down from $1.25 per share in the prior quarter.
Now, let me provide an update on our progress related to our strategic initiatives announced in Q4 of last year.
As you can see on slide 9 we remain on track to deliver on 8% to 10% reduction in core non interest expense and expect this to be fully realized on a run rate basis in Q4.
Highlights of the initiatives include the consolidation of 26 banking centers organizational actions to streamline execution and delivery for our customers optimization of corporate real estate and in June we launched our new digital account opening experience for consumers.
Turning to slide time Slide 10, I'll review the results of our second quarter allowance for loan loss under Cecil.
In the quarter, we reported $21.5 million benefit to provision and a $20 million reduction in the allowance the.
The allowance coverage ratio, excluding PPP loans declined from 164% to 149% with total reserves of $308 million.
As we look at the trend from Q1 to Q2, we built $10 million on reserves related to commercial and residential loan growth, which was more than offset by a $31 million reduction due to improved credit quality and the macroeconomic trends.
Credit quality improvements include a net recovery recorded in the quarter and downward trends in nonperforming loans and commercial classifieds. In addition, our macroeconomic forecast reflects improving trends in unemployment GDP and housing prices.
Slide 11 highlights our key asset quality metrics, which continue to improve nonperforming loans in the upper left decreased $30 million from Q1 commercial commercial real estate residential mortgage and consumer each saw linked quarter declines.
Net charge offs in the upper right reflects $1.2 million in net recoveries largely driven by consumer from a strong housing market.
Marshall classified loans in the lower left decreased $102 million from Q1, and represented 262 basis points of total commercial loans improve.
Improvement was driven by credit upgrades and pay downs within the sponsor and specialty and middle market businesses.
On slide 12, we provide detail on payment deferrals related to the pandemic, which has declined across the board down $121 million or 48% linked quarter and $182 million or <unk>, 58% from year end.
At June 30th total deferrals represented 6% of total loans.
Slide 13 highlights our strong capital levels regulatory capital ratios exceeded well capital levels by substantial amounts our common equity tier 1 ratio of 11, 65% exceeds well capitalized by more than $1.2 billion. Likewise tier 1 risk based capital of $12, 2.8% exceeds well capitalized led.
<unk> by $980 million.
With respect to the third quarter, we expect average core loan growth, which excludes ppt to be approximately 2.5 per cent <unk>.
Net to individual loan funding and payoff activity.
We expect PPP loan forgiveness of approximately $300 million.
Net interest income will be relatively flat, while net interest margin will be driven by the level of excess liquidity and the rate environment. We expect noninterest income to be in the range of Q2 levels on expenses, we expect to continue make progress on our Q4 goal of 8% to 10% core cost reduction.
And the tax rate will be between 22 and 23%.
With that I'll turn things back over to John for closing remarks, Thanks, a lot Glenn.
We remain committed to delivering for our bankers our customers our communities and of course, our shareholders consistent with our overarching objectives of maximizing economic profits over time, and creating long term franchise value.
I want to take a minute to thank each of our bankers for their dedication and perseverance and hard work. Our bankers have met the challenges of a pandemic a year long comprehensive organizational and strategic transformation program and the announcement of an integration work associated with a game changing merger, we expected a lot from our team and.
As our values based bankers always do they delivered with professionalism confidence and enthusiasm their commitment has enabled us to continue to deliver for all of our stakeholders with that Melissa Glenn and I are prepared to take your questions.
Thank you if you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press star 2 if you'd like to remove your question from the queue for participants using speaker equipment. It may be now.
Sorry to pick up your handset before pressing the star keys.
Our first question comes from the line of.
Matthew Breese with Stephens Inc. Please proceed with your question.
Good morning.
Hey, Matt how are you good.
First question, maybe could you talk a little bit about the the asset sensitivity of the combined institution and I really wanted to get a sense for how much of the combined portfolio will be subject.
It's floating rates and subject to floors.
Yes, so Matt good morning, it's Glenn So if you look at the combined organization were very similar from an asset sensitivity standpoint, and you can see back on in the back in the appendix our asset sensitivity to a ryzen 50 basis points, if I look at it and I look at the floating and periodic basis. So total loans 41.
Of that I would say about $26 billion is floating and periodic now there are some of those that have loans have floors. So youll, probably backup back out about $4.5 billion of floors.
And so that remaining piece.
Once you back that out.
Thats really whats, which would be subject to the first 50 basis point Bill say in the rates.
And that's where you would expect to get the asset sensitivity I think the wildcard here is is on deposit betas.
So theres been the historical data that had been around 30% to 32% I think thats come down it's come down significantly if you look at our asset sensitivity, we're showing a 6% increase in.
And people on our if we get the first 50 basis points moving rates and a lot of that's driven by a reduction in deposit betas and so you see that's come down to late from 30% to 34% to 28%.
So I think thats going to be the wildcard as we begin to see rates rise I think there'll be a lag on it could be anywhere from zero to 15% to be honest with you.
Great Okay.
Next 1 for me just on HSA third party accounts.
On the Tpa couches or rolling off slower than expected.
I'm, sorry, if I missed it but what's the remaining account balance that should roll off there on what's the new projection for when that transition is complete.
I think the remaining account balance.
And I'd, just say, we had that back on the slides if you look in the appendix.
$276 million.
And balances and I think the account balance.
Is 246000 accounts.
So.
John If you go back Matt and you look on our deck, you'll see that on page 16.
Where we spiked out the tpa balances in the accounts.
So as John mentioned, there was about $120 million that moved out in the quarter.
And that was about 38000 accounts okay.
Got it.
On that just to remind you we talked about that it seems like 10 years ago, but it was third quarter of 2019 based on a transaction the wage works transaction with health equity and another 1 of our sort of custodian accounts getting their own deposit charter and so we really don't have control of the timing of the departure and we also get.
Exit fees during the quarter they leave so.
At least in the short term there is not a big economic impact over the long term, obviously, we'll replace those with.
Accounts that are core to us that are more profitable ultimately.
Okay.
And then last 1 for me.
I just noticed that in fee income other fee income was down quite a bit quarter over quarter came in at $8.4 million versus $12 for last quarter. What was the driver of the decrease there anything 1 time that you would point out.
So a big driver of that was.
<unk> on our customer derivative book and that was driven by a lower forward curve on on LIBOR. So what happens the what happens there is debt.
The customer swap assets increase and.
And so the credit portion of that also increases now that's an evaluation adjustment I will point out that there are all cross collateralized. So it's not necessarily a risk it's more of a function of the rate environment, you'll see some volatility net particularly as rates of bump jumped around so much quarter over quarter.
And Matt that's a good question because our core kind of operating.
Noninterest income fees were kind of flat in general and we had slight increase in our retail deposit fees slightly lower swap and syndication fees, but.
That valuation adjustment is really what.
Caused the delta between last quarter on this.
Got it okay. That's all I had I appreciate taking my questions. Thank you.
Hey, Matt.
Thank you. Our next question comes from the line of David.
<unk> with Wedbush Securities. Please proceed with your question.
Hi, good morning, Thanks for taking the question. So I wanted to touch on loan growth. It was great to see the rebound here in the second quarter.
Curious about how much of it is a function of increased loan demand from the borrowers versus you guys kind of pushing the envelope and being a bit more aggressive given how difficult the loan growth environment is for the banking industry.
David I have a wise <expletive> answer to that question, but I won't.
I won't do it well, obviously, we're not pushing we're not pushing the envelope on on structure or price too much I will say that.
Pricing environments really competitive.
Talking to our head of commercial banking.
The structures haven't moved really far away, which is good but.
All good transactions, particularly in areas like commercial real estate asset based lending and others are extremely competitive from a price perspective.
This quarter, we're really pleased with the loan growth and as I've said, probably a million times on these quarterly calls.
1 quarter does not make a year and it depends on what happens with respect to payoffs and paydowns originations, but I will say that I'm proud that our commercial bank over the last 7 or 8 years is just posted 10% organic loan growth on an annualized basis year on year out so in this quarter in particular.
As I mentioned kind of traditional middle market, which was a really good sign that includes our public sector finance.
And on our geographic middle market offices.
It did really well and had strong originations, our sponsor and specialty businesses and select verticals like health care health care technology.
And technology in and of itself.
Continue to have significant demand and did quite frankly throughout the pandemic, which which obviously helped us continue to grow loans. So.
As I've said, many times, we have tons of levers to pull across our geographical regions asset based lending equipment finance, our specialty verticals commercial real estate business banking.
And this quarter, we just happened to see really nice originations that fit our.
Ray rock model they have good risk adjusted returns they fit our credit model and we remain confident that over the long term we can keep.
Generating loan growth at the top of the market rates.
And it sounds like the pipelines are pretty strong can you comment on where pipelines are today versus say a quarter ago.
But clearly a year ago, the pipelines for pretty bad, but can you talk about.
Pipelines today.
Yeah, I mean, I will say that our stated pipeline is stronger than it was last quarter and stronger than it was a year ago.
Again, I'm always hesitant because it seems like in our businesses, particularly the transactional ones prepayments can drive ultimate growth, but from an origination perspective.
Across all of our key businesses pipelines are up.
And then lastly on utilization rates on revolving lines can you discuss where that utilization rate is today versus a quarter ago.
Yes, I will it's stable and I think this is the first quarter to quarter period, where we've seen significant stabilization and maybe even a tick up but I'm not going to declare victory. There utilization rates are still below pre pandemic rates I think that has to do with so much liquidity on the system as.
As well as supply chain imbalances in People's inability to maybe build inventory in certain sectors. So if I look at ABL or across our traditional committed revolvers in commercial I would say, we've seen stabilization to a slight tick up in utilization, but still a good fight.
On to 10% on average below pre pandemic levels.
That's great. That's impressive that you had such good growth with stable.
Utilization rates, so that'll be a nice tailwind going forward. Okay. That's all I had thanks very much. Thank you David and thanks for the comments.
Yeah.
Thank you. Our next question comes from the line of Chris Mcgratty with Keefe Bruyette <unk> Woods. Please proceed with your question.
Hey, good morning.
Hey, Chris.
It kind of a question I asked on the on the Sterling call. This morning was they sold some loans that were deemed higher risk into the close is there anything given the liquidity in the market. It's pretty high is there anything on your balance sheet debt might be.
Kind of ripe for pruning before for you consummate the merger.
I would say no strategically that.
There is nothing really on our book that we think.
We would want to sell right now.
We have.
<unk> sold off.
Non performing consumer loans at times, where we thought the economics for right and we didn't have to carry them, obviously, because they are a drag on a longer term workout, but there.
There are no pockets.
Chris in our balance sheet right now that we're eyeing on loan sales.
Okay.
I would note I'd note interestingly because I wanted to get this and that I believe this was our first net recovery quarter since before the great recession, which is pretty remarkable considering we just came out of a pandemic and I think it goes to show how much liquidity is in the system and what government stimulus is done but we were we were even surprised by.
Net outcome.
Okay. That's a great development on the on the merger call you were I think pretty confident about the pro forma.
Growth opportunities other company this quarter would certainly give give credit for that is it right to assume that today versus 90 days ago.
You're feeling better about I guess, both near term and intermediate term loan growth.
Yes, I'm feeling as confident.
Let's say as confident Chris I'm not sure I think our view always was and you heard us talk on jointly on that call our expectations of loan growth for 2021 individually on on a combined basis kind of in that 4% to 5% and.
And we talked about the fact that the second half of this year could be still.
Loan growth because of how much liquidity was in the system. Obviously, we reported higher loan growth after a couple of our peers.
And as we head into 'twenty, 2 and 'twenty 3 we've talked about 8% to 9%, 8% to 10% growth overall and I still feel pretty confident given what's going on in the economy, perhaps in some kind of real change with the Delta virus.
I think this quarter certainly gave us.
Additional confidence on our ability as we move forward to hit those numbers in 'twenty 2 'twenty 3 on a combined basis.
Okay, that's great color.
I just wanted to make sure I understand the guidance for them real quickly on for the quarter.
Net interest income.
Stability comment is that as that gap or is that excluding the triple play.
No Thats GAAP.
Okay, So $228.9 to about the same range, Okay, and I missed the TPP what was in.
In the quarter the contribution on whats left.
So PPP for the quarter contributed to net interest income of about $13.5 million, which is down from $18 million in prior quarter.
And we have $31 million in remaining fees and I would say if you look over the next 3 quarters is about a third a third a third debt. We are expecting for my forgiveness standpoint, so about $10 million a quarter in the next 3 quarters.
And then lastly, the.
The expenses in fees the expenses.
On the pace came down quicker than I thought is this the kind of the range that fully optimized like 167, 168% to 8% to 10% implies.
We as we showed on the slide I mean, our objective and.
And we feel very confident to get down to net 160 for on a core.
Expense run rate. So there's more of that debt will come along off of the second quarter.
Okay.
And the fees were adjusting for the mark to market or not I'm, just trying to make sure I get that right for the quarter.
The fees I'm not sure I understand the question wasn't your comments of stable fee income kind of going forward in the third quarter on yes, yes, yes, yes stable fee income.
So I'm assuming that the forward curve on the case.
Credit evaluations stay about stable.
Got it thanks, a lot with the clarification. Thank.
Thank you Chris.
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Please proceed with your question.
Hi, good morning, Thanks for the question.
Maybe for those of us a little bit less familiar with Sterling bigger picture I think we've all got a good sense of where your balance sheet is kind of headed here.
But is there anything you would call out in terms of Sterling dynamics that in terms of runoff in certain areas that.
It might help us kind of dimension the growth rate of the combined.
For our first good to hear from you and thanks for the question I would say no strategically right now on the work that we've done since after diligent since announcement is just confirm this debt I think all of the business lines that website debt Sterling operates in right now and the verticals are things that we will continue to look to.
Grow over the long term I think you know our.
<unk> framework.
EMEA, Jack and Luis and Glenn will continue to look at risk adjusted returns we will look at opportunities in the marketplace, we'll look at pricing and competitive dynamics will look at our position.
In the league tables, and whether or not we can matter in certain.
Set classes or verticals, but right now we're going in with probably over 20 different geographies and verticals and industries all of which we think are appropriate from a credit risk perspective, all of which we think we can grow and as you've heard me say oftentimes, having more levers than fewer levers.
<unk> is really helpful. Because you don't have to press on credit quality, you don't have to press on price in any 1 vertical that may not be as attractive during a period of time. So I would say when you put these 2 banks together at least pro forma initially we'll be executing in all of the verticals and geographies.
The debt are aggregated between the 2 banks.
Got it okay and.
I think we've got a good sense of the debt.
The loan trends on the on the funding side in terms of deposits anything you would highlight in terms of trends average.
End of period.
As liquidity wave here in the process of breaking or how would you characterize that.
We haven't we haven't seen it break yet so.
Average consumer balances average commercial balances.
Uh huh.
Municipal balances, which by the way Havent, even seen the peak of their tax collection season. They are all significantly above.
Average long term and medium term average trends.
So our expectation is debt will still be dealing with this for another couple of quarters.
Before we see kind of fulsome economic activity and people start to.
Draw down on their on their liquidity, both individuals and businesses as they move towards more purchasing activity and more investment.
Okay, great. Thanks for the color.
Thanks Brock.
Okay.
Thank you. Our next question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.
Hi, Good morning. This is TMR, Brazil are on for Jared.
Hey, guys, maybe just following up on that last question. So the loan growth you saw this quarter.
Are the borrowers maintaining higher levels of liquidity on your balance sheet and then borrowing in addition to that or are these borrowers that maybe don't have as significant a balance of deposits on your balance sheet and I guess, just as you're thinking about the excess liquidity out there both on your balance sheet on on the bar.
<unk> balance sheet to what extend is that 8 to 10 per cent longer term loan growth guide.
A matter of <unk>.
Growers' first working through their own liquidity before really getting into the borrowing base at a more normalized level.
Yes, that's a great question Jared on I'm not sure I can give you a really detailed response you know most of the growth for origination for instance in commercial real estate on sponsor and specialty you don't really see that dynamic because you've got deal transactions that are mostly I'm going to use the little L leveraged not regulatory leverage but theyre not.
Dealing with lots of liquidity, they're using debt to acquire companies and so there is not that immediate offset when they borrow their cash or their cash comes out are there. They are borrowing in lieu of deploying their cash I think it's more strategic deployment of debt capital.
That does happen in some of our business banking and commercial cases, where.
Youre seeing them have lower utilization higher cash balances and then as you see them start to draw down on their lines of credit you'll start to see.
Kind of the dynamic interplay.
When they get lower balances bill draw higher on their on their capital, but I don't think what we've said all along is our hypothesis is exactly what you just said, which is there's going to be a period of time, where loan growth demand will not return to its fulsome himself until you start to see some of.
The companies and borrowers draw.
Draw down on their liquidity.
But I don't I wouldn't say this quarter, we saw kind of an offsetting.
Activities and in deposit account balances and.
Drawdowns on lines or for the deployment of term loans.
Okay. That's good color and then maybe looking at the Sterling integration on how that process is moving along as you're getting deeper into the integration process and closer to closing the transaction I guess, how are you feeling about the cost saves opportunity I think you had broken it down.
Based on technology back office, and kind of corporate facilities and in the past.
Is that a seems its still a realistic it would be is there potential to upsize that and and see I guess.
Again, maybe going back on earlier question is there an opportunity to maybe do something on the balance sheet in advance of the deal.
Whether it's on the liquidity side or whether it's getting deeper into products prior to the deal close.
Yes, I would say answering your latter question first.
I wouldn't comment on any kind of activity balance sheet activity or or product moves between now and close and I would stick with our initial guidance in terms of expense.
I think both Jack and I mentioned that over the long term I think we both think that there are continued opportunities to leverage like functions and to continue to get more efficient, but I can tell you. The integration is going well and kind of the budgets that were handing out for people to hit are right in line with what we talked to the market about on April 19th.
I think that's the appropriate level of efficiency and the appropriate cost saves to be going into this.
This combination together and remember that that cost save.
That we talked about is a net amount, which does give us some investment flexibility as we put the 2 banks together.
Okay and then just last question for me modeling question. The $18.2 million of this strategic initiative and merger related adjustments can you just provide the line items that that's housing.
So it's primarily in professional fees.
TMR, it's Glenn.
That is all primarily for professional fees I think the piece thats relative to the initiative is more spread out in other and lease the lease line, but it's smaller amounts. So the biggest part of that $18 million in professional fees.
Got it thank.
Thank you for the next quarter.
Sure. Thank you. Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Steele for any for.
No comments.
Thank you very much Melissa we appreciate everyone joining today.
Have a great rest of the summer.
Okay.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.