Q3 2022 Webster Financial Corp Earnings Call
Okay.
Good morning, welcome to Webster Financial Corporation third quarter 2022 earnings call.
Please note this event is being recorded.
I would now like to introduce Webster's director of Investor Relations and then Harman to introduce the call. Mr. Harman. Please go ahead.
Good morning, before we begin our remarks mind you that the comments made by management may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
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 website at investors Webster Bank Dot com.
I'll now turn the call over to Webster financial CEO John CLO.
Good morning, everyone and thank you for joining us for our third quarter earnings call I'm going to provide remarks, our financial performance strategic execution and merger integration before turning it over to Glenn to review our financials in more detail.
The third quarter results announced today reflect the strong progress made in creating a high performing and differentiated company.
Solid execution on integration activities and are laser focused on delivering for our clients. We are one provide webster growing across a diverse set of business lines, realizing revenue and cost synergies supporting the communities and an expanded footprint.
Financial results that meet or exceed the target metrics, we set forth when we announced 18 months ago.
Our financial performance this quarter was stronger than last night on.
On an adjusted basis, we generated diluted EPS of $1 46 versus $1 29 last quarter net income available to common shareholders $257 million versus 229.
And <unk> was up from $371 million.
$316 million.
In terms of the company. We have created is evident in our results on an adjusted basis. We produced a return on assets in excess of 5% and a return on tangible common equity of nearly 20%.
CNC ratio was 41% in the quarter and over 400 basis point improvement.
These results exceed the full year 2022 pro formats, we provided when we first announced our merger in April 2021, we are surpassing loan growth expectations without expanding our risk tolerances.
We're proactive optimizing the balance sheet, we continue to generate solid fee income we've done an excellent job of maintaining client service levels, adding and retaining clients and talent.
Executing on the integration plan.
Given the positioning of our balance sheet, and NIM expanded 23 basis points to three 5%.
Loans grew meaningfully this quarter, driven set of industries and asset classes and geographies several of our major categories grew significantly including CNI.
Free and residential mortgage deposits also grew just under 2%.
While executing cost synergies and approaching an efficiency ratio of 40% we continue to make investments on the company.
We have said from the outset West post MLR.
We have been adding to commercial verticals, especially tier close we had the opportunity to add middle market bankers in our core footprint and through our National ABL team. We will continue to look for and make investments and colleagues and businesses that can grow our differentiated commercial business lines and that will generate.
Fees and loans look to maximize economic profit over time, we will also continue to work and technology that enhance colleague and client experience.
As we operate in an uncertain macro environment, we continue to execute on asset growth, while staying disciplined and prudent in risk selection.
Underwriting and portfolio management activities, our credit metrics remained remarkably strong lower npls and NPA.
Lower commercial classified loans and lower delinquencies, all compared to prior quarter on both a percentage of portfolio and absolute basis.
While you will see net charge offs were elevated from prior quarter at a reported 25 basis points annualized approximately $13 million of the net charge offs, resulting from proactive balance sheet management and optimization through the sale of more than 500 million.
Worth of loans that were either no longer strategic or had sub optimal risk return metrics absent those portfolio actions. The net charge off rate would be an annualized 13 basis points more in line with Q2 and still below our five year.
Slides range of 16% to 19 basis points.
A quick recap on integration as I touched on a number of the items that integration slide already we continue to integrate sub ledgers and systems relying our core infrastructure. This.
This quarter, we combined our commercial credit risk management system and rolled out consolidated commercial pricing tools and we continued our corporate real estate consolidation, where we are now.
<unk> complete.
Major milestones, we anticipate in the fourth quarter include the consolidation of cloud data centers, the transition of our consumer wealth and investment services operations to a third party provider and by year end all of our colleagues will have completed cultural activation sessions, establishing a common foundation for our organization and.
Aligning colleagues on strategy.
Behaviors and most importantly, the strong values that are at the foundation of Webster Bank with that I'm going to turn it over to Glenn to review our financial performance for the quarter.
Thanks, John and good morning, everyone I will start with the conciliation of core earnings on Slide four we reported GAAP net income common shareholders of $230 million EPS of $1 31.
And adjusted as we reported net income to common shareholders of 257 million and EPS of $1 46, each of which exclude onetime after tax.
Of $27 million.
Merger expenses were related to real estate consolidation severance and professional.
The strategic initiative expense is primarily a contribution to the Webster Foundation.
Next I'll review balance sheet trends before moving on to the income statement.
On slide five at period end total assets were $9 1 billion with total loans $47 8 billion and total deposits of $64 billion loan growth was predominantly driven by the commercial and residential portfolios.
<unk> were up over $900 million quarter over quarter basis, with both public funds and HSA contributing I will provide some additional color on the breakout later in the presentation.
Loan growth was also funded in part cash flow from the securities portfolio shorter duration FHL advances.
Slide six highlights some of our loan growth by category, a great illustration of the breadth of our promising slides in total we grew low of $2 two or four 8% on a linked quarter basis.
Growth was evenly between categories with C&I sponsor and commercial real estate, all growing $600 million and residential mortgage growing $1 billion.
Yield on the portfolio portfolio portfolio.
Sure.
Thanks.
Yes.
<unk> increased 60 basis points.
Accretion the yield increased 72 basis points, a reflection of 61% of the portfolio being floating or periodic.
Switching to deposits on slide seven.
Although deposit balances increased by $932 million or one 8% increase.
Increases in public funds and HSA drove the growth with the former up over $800 million in HSA up $111 million.
Corporate deposits grew roughly $500 million as we utilized a greater number of sweep and other alternative sources of funds.
The total deposit costs increased 28 basis points from nine basis points prior quarter.
Our effective beta was 13% in the quarter and 11% since the closing of the merger.
HSA cost of deposits were unchanged illustrating the value of the business in a rising rate environment.
A final note on HSA, excluding third party administered accounts deposits grew 700 million or nine 8% year over year.
Additional detail on HSA Bank is on slide 20 in the appendix.
Beginning on slide eight I will review the details of our income statement, we provide our reported to adjusted income statements by line item and compare our adjusted earnings for the second quarter.
Significant growth in net interest income this quarter drove meaningful improvement in <unk> net income and EPS.
On an adjusted basis <unk> was up $56 million or 17, 6% net income was up $28 million or 12, 4% and EPS was up 17 or 13%.
Ill cover the individual line items in more detail in subsequent slides.
The net interest margin was 354% up 26 basis points on a reported basis and our efficiency ratio was 41% down 408 basis points.
On slide nine net interest income grew $64 3 million relative to the prior quarter adjusting for accretion in both periods net interest income was up $76 8 million.
This was an exceptionally strong result, driven by growth in the asset sensitivity of our balance sheet <unk>.
Excluding accretion the net interest margin increased 35 basis points to 344% in the earning asset yield was up 57 basis points in the quarter also excluding accretion.
In addition to the trajectory of our benchmark rates the increase in loan yields accelerated as a portion of our loan book that re prices is no longer impacted by floors.
As illustrated on the earlier slide the cost of deposits increased 19 basis points quarter over quarter.
We anticipate deposit pricing increases in the coming quarters. Our name should continue to grow given the attractive profile of our earning assets, which reprice and originate at higher absolute rates.
On slide 10, we highlight our fee income for the quarter on an adjusted basis. These were down $7 million linked quarter and $3 million year over year. The linked quarter decrease in fee income was driven primarily by lower levels of customer interest rate hedging activity and other transactional loan fees in commercial banking.
The year over year decline was the result of lower direct investments in mortgage banking income.
Slide 11 summarizes noninterest expense, we reported adjusted expense of 293 million relative to prior quarter of $292 million.
We continue to make progress on cost efficiencies related to the merger. However, this quarter included increased levels of performance based compensation.
The year over year decline of $2 million is a combination of our cost save efforts to date offset by the increase in intangible amortization the band acquisition and performance based compensation.
Slide 12 highlights our allowance for credit losses, which was up $3 million over prior quarter.
After recording 28 million of net charge offs, we recorded $31 million and provision expense with loan growth representing $20 million of the increase and macro factors, adding $11 million.
On slide 13, we highlight our key asset quality metrics.
On the upper left nonperforming assets declined $38 million or 15% quarter over quarter, Likewise commercial classified loans declined $98 million or 14%.
Net charge offs in the upper right totaled $28 million or 25 basis points of average loans on an annualized basis as John mentioned $13 million of the charge offs were related to portfolio optimization activities without that net charge off rate would have been closer to 13 basis points.
The allowance coverage declined modestly from $1 two 5% to one 2% at period end.
The allowance to nonperforming loan ratio increased to two seven times two.
<unk> seven times up from two three times last quarter.
Coverage as a percent of commercial classified loans increased to 95% from 81% last quarter.
Slide 14 highlights our strong capital levels, all capital ratios remain well in excess of regulatory and internal targets.
Our common equity tier one ratio remains strong at 10, eight 2% and is still above the medium term operating target of 10, 5%.
Tangible common equity ratio was seven 7%.
The net of all capital effects. This quarter resulted in a slight decline in our tangible book value per share which decreased to $27 69. This.
This was primarily driven by Aoc high valuation share repurchases and partially offset by strong earnings.
I'll wrap up my comments with our outlook on slide 15, we have narrowed our view down to the remaining quarter we've.
We expect GAAP net interest income on a non FTE basis of $5 $70 million to $590 million, excluding accretion driven by our projection of a yearend fed funds rate of 425% as well as continued loan growth.
This excludes $15 million of scheduled purchase accounting accretion the details of which can be found on slide 18 in the appendix.
For those modeling net interest income on an FTE basis, I would add roughly $14 million to that measure.
Relative to last quarter, our outlook implies full year net interest income excluding accretion of $2 billion, an increase of roughly $100 million or 5% from the outlook, we provided last quarter.
We expect loan growth for the quarter will be in the range of 2% to 3%.
Given progress so far this year.
That would imply a growth of around 14% since merger close relative to our original target of 8% to 10%.
Fee income should be in the range of $105 million to $110 million, which incorporates the impact of lower fees on the outsource consumer investment business.
<unk> expenses are expected to be in the range of $2 $90 million to $295 million, which includes increased performance based compensation relative to our prior estimates on capital. Our overlook overall philosophy is unchanged as we approach our medium term operating target our granite organic growth opportunities will likely occupy a greater share of <unk>.
<unk> deployment, and we will remain disciplined in evaluating opportunities to effectively deploy capital and lastly, we are forecasting an effective tax rate of 22% to 23% with that I'll turn things back over to John for closing remarks.
Thanks, Glenn we recognize we are operating at a time of uncertainty in the macroeconomic and geopolitical landscape and that there are wider ranges of potential outcomes that it could impact the operating environment, we believe that our diversified and high quality businesses and loan and securities portfolios are healthy capital and loan reserve positions are.
Our credit and operating risk infrastructures and the quality of our colleagues all have is prepared to effectively navigate the macro environment ahead as I mentioned above we are being thoughtful in our loan risk selection and emphasizing strong underwriting and portfolio management processes.
I want to wrap up by emphasizing the outstanding progress we've made year to date and the momentum we expect to carry forward. Our commercial loans are on pace for 14% growth. This year as we pursue growth in businesses, where we have a strategic advantage and the ability to be selective with respect to risk profile and return metrics.
Our deposit franchise positions us, particularly well relative to peers, where our total cost of deposits increased just 19 basis points relative to a 57 basis point increase in our earning asset yields excluding the impact of Accretable yield.
We remain confident in our ability to fund future loan growth given our multiple deposit channels and our liquidity profile.
We expect we will continue to meaningfully benefit from interest rate increases and we have levers to pull in terms of capital allocation efficiencies and investment to maintain the current momentum.
We will be sending out a save the date, but we wanted to provide a heads up that our intention is to hold an investor day in New York City on March 2nd.
Youll have the opportunity here from our talented management team on our company and the go forward strategies and financial performance expectations for 2023 and beyond and.
Finally, thank you to my colleagues for their continued diligence and hard work as they execute on our core business initiatives, while addressing the added challenge of integrating the new Webster and I want to apologize I understand we had some technical difficulties at the beginning of the call and I. Thank you for bearing with US operator, Glenn and I will open it up to questions.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Chris Mcgratty with Keefe Bruyette <unk> Woods.
Yeah.
Thanks, Hey, good morning. Thanks, Thanks for the thanks for the question.
Maybe Glenn.
The upgrade NII guide the $100 million.
Very good very good update.
One of the trends we've seen this quarter is the narrative around peak NII.
Wouldn't seem like Thats the case, given given this but can you speak to growth from that fourth quarter level as you go into 2023.
Be interested in your thoughts there. Thanks.
Got it.
Great. So let me just start I'll talk a little about NIM. So just for texture I think our ex accretion our exit NIM in September was 355%.
And then I would think if you look at our Q4 range I'd, probably put that in the range again ex accretion of three 6%.
So we continue to see NIM expansion.
As we look out into 220.
2023, I think there's a couple of factors one is that our modeling we're expecting peak fed funds in the second quarter of around $4 50, right and so given that dynamic and our data.
We're forecasting again in like the low <unk> over the next four quarters, we continue to see NIM expansion now, we see NIM expansion going into the into the first quarter.
And then we see more modest NIM expansion in the back half of the year.
So I think we still feel really positive about the prospects in 2023. The dynamic here is that even though we have higher deposit pricing, which we are expecting our asset book is repricing.
More significantly.
Okay, that's great great.
The 30% below 30.
That's interesting is that total.
I'm sorry is that.
Is that for all deposits Youre, just interest bearing interest bearing that's.
Im looking at the total deposit costs.
And I would say.
Lower thirties over.
Over the course of four quarters.
Great and then if I could.
The accident you took in the quarter to clean up credit could you just provide a little more color on that I think you said you.
I think there is a loan sale, maybe I guess what prompted this could you consider more.
I guess, how should we be thinking about the confidence in credit going into the year.
Yeah, Chris happy to talk about it and I think it's important to talk about it I think it was less to clean up credit and more literally to kind of optimize our balance sheet going forward. So we've talked publicly in the beginning that after diligence and closing the deal we liked all the businesses, but that over the next four to six quarters from close as good stewards.
Capital, we would continue to look at all of our businesses to see whether they remain strategic whether the risk return dynamics were strong whether or not there were any potential kind of credit weaknesses. As you looked out over paradigm shifts and so we took the opportunity I mean think about it we grew loans around 5%, including the disposition.
<unk> of over $500 million in assets and with the tailwind from our asset sensitivity and the strong organic loan growth in key segments. We thought it was a great time to take those actions and if you think about it again look at the total charges related to those actions over the over $500 million.
The average sale price was like 98.
So there's certainly certainly werent sale of distressed assets and there were no sales in there there were portfolio sales.
Two regulated banks. So this was not kind of a cleanup of credit right in front of us, but obviously in a higher expectation of spread environment. There is an interest rate impact on the discount on the prices and there were some note sales of non strategic office for example that we thought would be.
Now would be a good time to dispose up so.
We just thought it was a really.
Mark move and obviously.
We think it will benefit us going forward as much from a.
Return on equity perspective, as from and avoid credit issue perspective.
That's great color I agree good move.
Do we expect more into the end of the year or is this kind of debt.
I don't see anything right now so we don't have that in our guidance.
I don't think it's going to be a reflection of what we do every quarter going forward, we really like the businesses. We're in but obviously as we said we'll continue to look at the dynamics of the combined portfolios.
And so if there are opportunities there.
Makes sense from an economic perspective, or give us more flexibility going forward or protect us from potential paradigm shifts in credit we will do it but nothing in our.
In our sites.
Great. Thanks, John .
Thank you.
Your next question comes from the line of Mark Fitzgibbon with Piper Sandler.
Hey, guys good morning, Mark.
Morning.
Glen I wondered if you could share with us what's your the spot rate on deposits are today.
Sure.
I know that we ended the quarter.
I think we are.
Let's see here so.
I would I would put it in a range.
Great.
Let me yes.
Yes, it might be say in the range of 60 basis points 60 to 65 basis points.
Okay great.
And then secondly, just to kind of follow up on one of the earlier questions about credit.
I'm curious how you guys are when you do your modeling how youre thinking about the provision line.
Yes.
Mark as you know, we think a lot about the provision line and we have a relatively conservative bias, but that doesn't always factor in particularly with seasonal and the way. It works now so I would say at a high level and then Glenn can certainly feel free to fill in the dynamics this quarter were significant loan growth.
Right, which requires a higher reserve, the Moody's scenario, which us and many of our peers use.
It's kind of worse right, which requires in general Directionally more reserves than you saw our credit stats, which as I said I used the word remarkably not to brag, Jay just to be like surprising in this environment right that our NPA and our classifieds were down materially so that's kind of.
Good Guy if you will and then I will tell you that as I am looking at the portfolio one encouraging data point for me is that in each of the last three consecutive quarters. The average rating risk the average weighted risk rating of our originations is actually better than on a material base.
Since then the actual weighted average risk rating of the existing commercial portfolio translated into the fact that we are bringing on lower risk assets than we have each sequential quarter, which ends up bringing down the overall weighted average risk rating, which again would be a good guy. So you saw those dynamics bigger loan portfolio more rich.
<unk>.
Worse forward looking economic scenario for Moody's more reserves better asset quality metrics lower reserves, and then higher quality originations lower reserves and Thats kind of where we ended up we feel really good. If you look at our peers Mark we're still top quartile at least in terms of our reserve coverage ratios.
I'm pretty pleased with where we are we also have a lot of capital so.
That's kind of the way I'm thinking about it.
Yes, the only thing I would add to that Mark is that John talked about the loan growth $2 2.020 billion provision against that and then if you look at the macro factors that we have $11 million on the slide here, but it's really two things one of you. If you just strip out the Moody's impact and the fact that they slashed GDP est.
Estimates I mean, thats, probably $20 million in sort of client netback is $9 million. So the net $11 million of those two things of that $9 million is really related to as John highlighted the improvement that we see in Ngls on our books commercial classifieds et cetera.
At a weighted risk.
Metric that's improving.
Great and lastly, I wondered if you could give a sense for what your loan pipelines look like today and maybe also share with us what the commercial line utilization rates are.
Yes, I'd say, we're still tracking all of the different I would characterize the line utilization is flat to slightly up not materially across all of our commercial business as mark and I am not sure what that evidence is I mean, I think still solid demand.
But.
They're not it's not expanding at a crazy margin in ABL for example, which is usually a harbinger of faster.
Working capital cycles, I would say flat to <unk>.
Marginally up.
Pipeline is the pipeline is relatively strong in certain sectors.
I kind of feel like we will see.
<unk> of loan growth over the next couple of quarters in kind of core middle market areas. We have seen some slowdown in the trading of real estate assets or in the sponsor book in terms of people selling companies in and buying companies. So that has an impact but.
If I look just at my pipeline report, which obviously I did last night.
It's robust and it's similar as.
You would see slightly above third quarter going into fourth quarter, where theres, usually a heightened amount of activity.
Thank you.
Hey, Mark before you go let me just clarify something that I may have misunderstood. The question. The other deposit cost in the second quarter I think we exited like at 41 basis points.
The fourth quarter, we're expecting that to be in the range of 55 to 60 just for clarification.
Thank you.
Sure. Thanks, a lot mark.
Your next question comes from the line of Casey Haire with Jefferies.
Yeah, Hey, thanks, good morning, guys.
Hey, Casey.
How are you guys doing.
And then just just to clarify I think you meant.
You said third quarter.
It exited the quarter the 930 spot rate for deposit costs ended $55 60, or you expect fourth quarter to end.
The third quarter, the third quarter right now, we're at 41 basis points and as you go into the fourth quarter.
Beta assumptions, we're probably in the range of 55 to 60 basis points.
Okay.
Thanks for clarifying all right. So I was wondering about the funding strategy.
In the fourth quarter underlying your NII guide here. So in the third quarter, you guys kind of had a nice balance between a rebound in the muni deposits rundown of securities and a little bit of borrowings.
What is what is the outlook for the fourth quarter and beyond here.
Yes, so great question. So if you look at our loan guide.
So it would take a right in the middle between 2% and 3% you're probably at a $1 two or something like that so let's just use that as a proxy I think the thing that's really encouraging about the franchises that we've pointed this out a few charges that we have so many multiple levers of funding and liquidity sources.
That's really encouraging so as I look at funding going into the fourth quarter and even beyond some of the key drivers will be things like the continued run off of our securities portfolio as we invest that in loans I think we have.
Deposit growth in some of our commercial segments, obviously HSA.
As we get towards the first part of next year.
And then we have digital deposit gathering sources, whether it's whether it's brio, where theres banking service things like that and then lastly.
From a liquidity standpoint, we have plenty of sources of funds as far as.
Funds that we can draw data, but that would be sort of the last thing we do so.
We continue to feel good about our funding our funding ability.
Gotcha Okay.
The guide is predicated on.
The 100 bps of fed hikes here.
What kind of upside is there.
Forward curve is at 475 by year end, what kind of upside would there be if it plays out.
<unk>.
Yes, I mean.
Look we're.
We're using our estimate right now of $4 50, obviously there is there is more upside.
You can figure it out mathematically but.
I don't I guess the thing I would point out is.
The significance of our assets repricing.
And.
Slowly betas coming around so I don't have that where our model is it peaking at $4 50, if there's upside to that that would be additive gender.
Generally.
Okay very good and just last one on the.
On the credit front, so the $500 million.
Disposition was there anything front was there any was the sponsor and specialty finance book touched and just any color on the.
If my math is right there was about $16 million of commercial losses outside of the disposition just any color on what was driving that.
Yes, nothing in sponsor and specialty was disposed of.
And with respect to the core 13 basis points that I reflected driven by two commercial credits Casey.
One of which had been classified since pre pandemic and finally capitulated.
Neither of them were in the same geography asset class or kind of had anything that I would say is systemic in there I feel pretty good about 13 basis points of charge offs.
Point in the cycle so.
Nothing to say, except two unique credit credits that ended up having a loss given the swaps at the end of the day. Unfortunately.
Understood. Thank you guys.
Thank you Casey.
Your next question comes from the line of Steven Alexopoulos with Jpmorgan.
Hey, good morning, everyone.
Hey, Steve.
I'd like to start on the deposit side. So if we look at noninterest bearing deposit balances actually had pretty decent growth in the quarter, while banks everywhere, we're seeing outflows.
How did you Buck the trend in the quarter and do you now expect to see outflows of those moving forward.
Yes, Steve obviously, its relatively good news, but we're also pretty realistic about it there was some seasonal.
Inflows from government deposits right and so our focus going forward is on making sure.
And then as we kind of go through the next few quarters that our focus is on continuing where we're growing loans to grow full relationships to grow commercial deposits. Obviously, we're going to get the benefit of HSA as we get to year end and first quarter.
I think we did it largely because we've got really sticky deposits in our retail franchise I think we've got really good commercial solid deposits with our relationships, but I would have to say that.
Lot of the reason, we were able to claim a 2% deposit growth. When there were outflows was a seasonal slow and from from government deposits. So as Glenn said.
I think what's great right now about the way that our balance sheet is made up as we we do benefit from this asset sensitivity significantly obviously, we're taking prudent measures to make sure whenever the time comes when fed fund rate comes down we're protecting our our cash flows but it does give us some pricing flexibility in key relationship areas.
On deposits and obviously we're.
We're focused now on continuing to generate core deposits, but we have got HSA, we've got the direct bank and Brio, which has a higher cost deposit, but nonetheless, a deposit that we found to be stickier than we originally thought it would be and then we've got obviously all the diversified business banking commercial segments small business and retail so it's going to be.
Work and we're continuing to focus on it right because if you're growing loans at the clip. We are we need to make sure that we're continuing to generate good sticky deposits going forward, but.
We'll take the victory of growing deposits in the quarter, but we also did benefit from government seasonality.
Okay. John can you size that for us what was that benefit from the seasonal inflow from government deposits, but I think it was that.
800 801 million Steve.
The quarter over quarter right. So.
And it was sort of a decline in the commercial I think we have.
Chas this slide.
And offset by some wholesale funding.
Okay.
I wanted to also ask so the loan to deposit ratio has moved up quite a bit over the last few quarters.
Where do you see that stabilizing.
So we feel good about operating in.
The high 80% to 90% range.
Given given the environment today.
So that's that's where I would expect it to be is in fact as I look out over the next couple of quarters, that's where that's exactly where it is.
Got you okay.
And then finally, so regarding the acquisition of people. This deal has attracted quite a bit of attention and Connecticut, particularly around the system conversion that didn't seem to go as planned how much of an opportunity is that for you right. You're the bank I think of most that could benefit from what's going on there and have you seen any increase in client acquisition related to all the negative news on that.
Thanks.
Steve You can't aspect you can't get me on that question I have such respect for that bank.
Look we've talked about this in the past that it's interesting in a lot of our key businesses, we really don't overlap with peoples and we didn't overlap with peoples and we don't overlap with the combined <unk> peoples.
They're obviously had been some disruption peoples bank clients are loyal because people just a really good bank.
There are opportunities obviously with with.
Colleague disruption there as well because that's not an <unk>, it's an acquisition and so there are opportunities from a personnel perspective and from a client perspective over time, but.
As I said, it's a good bank and I wouldn't want to comment on specific opportunities.
Hey.
Fair enough thanks for taking my questions.
Thanks, Steve.
Your next question comes from the line of Matthew Breese with Stephens, Inc.
Good morning.
Hey, Matt Hey, John you alluded to this earlier just talking about maybe a softening of loan growth next year, but I was hoping you could better kind of frame that for us I think historically, you've always positioned the bank be kind of a high single digit grower, obviously company last few quarters have been better than that.
How would you kind of frame for us what next year expectations are and then secondarily just just a sense for current rate on the pipeline.
Yes, I'll leave it there.
Yes.
Yes, no great question and.
We're not changing guidance I think we're 8% to 10% year in and year out this.
This year I think we've been selective we've got a couple of categories that have really driven growth and I think we're fortunate that they tend to be categories with lower loss, given default, which I'm happy about in this cycle.
As I mentioned earlier to one of the questions our pipeline remains robust.
We're going to have the ability in the luxury and I think many of our competitors will as well to be a little bit more selective on on rate.
And structure.
Just given the fact that some of the nonbank lenders and their cost of funds and other dynamics are changing the nature of the marketplace. So I still feel like when we made the announcement in April of 2021, one of the premises of the deal was that we on a combined basis.
Could grow our commercial loans, 8% to 10% year in and year out. We're obviously benefited by a bigger balance sheet and higher hold levels, which we've talked about so even if the loan market and loan demand slows a little bit some of the niches and verticals and relationships that we have continued to enable us to grow loans. So in our model.
We're still looking at 8% to 10% loan growth.
Next year, regardless of kind of what the overall demand environment is and I believe we can do it safely.
We don't want Jason on the call obviously, because you never want your chief credit risk officer on the earnings call at generally portends to bad things, but if he were here I think we're able to kind of narrow our focus and resilient businesses stay away from things, we think are more cyclical.
And continue to grow loans safely at 8% to 10%.
The only thing I would add.
When you look at the quarter I think our originations were probably about and this is the.
The third quarter at about 525, 2% right and so as we look out it's probably going to be.
Closer to the range of like $5 50 to 600.
Origination rates.
Understood Okay.
And then could you just talk about digital deposits the balances.
Between Brio direct and then the banking as a service segment and how much of your funding projections should we be thinking rely on these buckets versus traditional.
Street retail and commercial.
Yes, Matt sure and I think I've been pretty.
Consistent in saying.
We've tried to lean in in those areas. Obviously breo is is up running and proven.
We're able to generate some deposits there we did in the second quarter. We did in the third quarter. Glenn can give you the number as it relates to banking as a service I don't know whether this is a pivoted narrative.
In the second quarter.
I talked about the fact that we.
Have three or four relationships that are live with a pipeline of about $500 million to $750 million of deposits, but we really didn't factor in significant profitability or contribution nor did we factor in significant investment in the banking as a service space I think the update.
There is things are a little slower than we thought Luis and I continue to kind of narrow our focus in those areas, where we think we can drive.
Core deposits and drive kind of liquidity.
Not factoring in significant funding from the Bas channel over the course of 2023, so we're not relying on that in our model that would be upside gravy with respect to Breo. We do expect to have that as part of our Arsenal and maybe Glenn you can see yes sure. So I think just to start like digital direct is probably will be about $1 billion.
One.
Right now and so were the biggest driver of that being embryo.
But as you know <unk> like.
More of a higher beta type products, but it is a lever that we have that we can get we can get.
Good funding and.
As long as we're turning it into loans in a range of $5 50 to six.
That that's a pretty good funding source so.
I think <unk> is one channel that we have that we can pull the lever. We can we can adjust that pretty quickly.
And then as John mentioned, the banking as a service and stuff like that but more importantly, I think.
Besides the securities portfolio running off.
We expect to have deposit growth in commercial segments.
HSA as you know will come in in the first quarter. That's the enrollment period. So we should see a pop on the HSA as well so it is again.
Again, I keep coming back to it because I think it's really unique for US is that we have so many multiple sources of funding.
That.
That will continue to distinguish us in certainly is playing out in their financial forecasts.
Okay. Thank you and then last one from me just going back to the loan sale I think there's been some lingering questions on whether or not there were areas of the sterling portfolio that would eventually be exited or to be continue continued to be part of the story.
Did the launch I'll have anything to do with kind of legacy Sterling ancillary segments and if so what were those.
Yes, I'm not going to talk specifically I think the overall theme is both banks had kind of sub optimal risk return businesses and as we work through them.
Or is it as a $70 billion back now we have the opportunity to decide whether or not we can either accelerate and corrected improve businesses or decide to exit. So I guess I'm trying not to be too Matt I think the answer is kind of.
Not specifically related to legacy Sterling, but related to the entire organization. There are sub optimal portfolios that kind of we've looked at and move through we were able to kind of act on everything we identified in the quarter as things, where we didn't think we were going to be able to get return for the appropriate risk or as I said.
On a couple of select note sales.
In key areas, where there may be paradigm shifts like office, we were able to kind of lighten our exposure so.
I'm going to leave it at that and I don't think its a worry.
Characterize it as kind of like a worried but there are subs sub scale in sub optimal businesses that we will over time figure out whether or not we want to accelerate.
Or whether we want to exit whether that exit is a loan sale or just us a wind down of the business.
That will happen over time, but right now we love the portfolio of assets, we like the credit quality a lot in the entire back when you bring all of the portfolios together.
Understood. Okay. That's all I had thanks for taking my questions.
Thank you.
Your next question comes from the line of Jared Shaw with Wells Fargo Securities.
Hi, Good morning, This is kumar, Brazil or filling in for Jared.
Thank you Mark.
Hey, guys, maybe just starting on the bond book and using that as a source of funds.
Does that slow with the expectation that loan growth slows and does that pretty much and in the first quarter as HSA seasonality kicks in I guess, what's a good kind of.
Base, we should be thinking about for the bond book.
So I think you would continue to see social it has extended with the horizon rates.
So our cash flow has come down a little bit, but still for the quarter, if youre using something in the range of like $2 50, and $250 million I think that's pretty good right.
So that's how I would generally model it.
But we continue to.
Reinvestment what came off in the quarter and the third.
<unk> like 200 $238 million it came off at 283% right. So if we can reinvest that loans you can see the spread difference right. So.
We'll continue to do that.
As a source of funding for loans going forward.
Did you have a second part to that question.
Just with HSA coming on in the first quarter and that being used as a fun call does that kind of three.
Three years that the strategy that will be used in 2012.
I mean I think.
We've talked about this but I think if you look at the total book at $15 billion, we sort of think of it as part of it is that the deployment of the excess liquidity, we head back a couple of quarters ago. So.
That's done well for us from an earnings standpoint, but it's always been our attention to to sort of move that into the loan book and pick up a 150 are now 200 basis points in doing so so even with HSA coming in the first quarter, given our loan growth for the year.
I think that will still be a good source of funding for us.
Okay.
And maybe just bigger picture on the Sterling integration I mean, the results post deal closing have already been quite strong integration is still kind of slated for middle of next year. What changes once that integration is complete is that just youll be able to take out some more expenses or do you expect to see some operational gains kind of and how lending or deposit.
Generation is being conducted.
Yes.
Really interesting question I think.
Don't have a material impact on our ability to generate revenue right. One of the things we talked about with this transaction is the complementary nature and again I always harp on this and I'll take the opportunity to do it again is that a lot of times when <unk> don't deliver either in time or are they don't deliver ever it's not because of the cost saves this wasn't.
The cost save deal only 10% of the combined.
Cost save no no banking center consolidations out of the gate right. It was really about the fact that we were able to put two banks together, where everyone could continue focusing on their customer because there was virtually no overlap from a retail business banking or commercial perspective, and I think thats proven that's proven out so when we get the.
<unk> integration and conversion done next July I don't think that.
Signals are addition to accelerate revenue except to your point of having maybe a more resilient and scalable operational.
Platform, but for us what it will do is we will finally get to retire one or two core systems will kind of finally get to retire several commercial sub ledgers.
And make.
And make us more efficient over time, so we do feel like our operational effectiveness will be better operational efficiency in our cost structure. We will certainly go down and that's one of the things we're excited about you've seen.
Obviously inflationary pressures on the industry throughout we still have another 12 months to 18 months of the ability to offset some of the pressures.
Of of inflationary expenses on wages and other things by the fact that we still haven't consolidated three call centers, we still haven't fully gotten to our conversion on our core system. So all of that should give us kind of more flexibility from an expense perspective, I don't think it'll it'll it'll change the trajectory of revenue growth.
Okay, Great and then just last for me more of a modeling question.
The scheduled accretion guide of $14 6 million and <unk> 22.
Do you have any visibility as to what accelerated accretion in the quarter can be just kind of looking at the.
Delta between third quarter accretion in the fourth quarter guide and I guess for the third quarter accretion.
Was any of that component driven by the loan the $500 million of loan sales or that kind of drive any of the accelerated accretion component there.
This is generally it's prepayments accretion, Dan obviously quarter over quarter, but there'll be volatility.
When we did when we announced and put in the you see the impacts of purchase accounting back on page 18 of the slide but that was just based on scheduling and obviously as customers prepay and stuff like that that will accelerate right.
I think there is probably about seven maybe smaller amount that's probably six to 700000 due to the loan sale.
And that accretion number, but it's not meaningful.
But looking at the <unk>.
I guess, it's hard to look at the pay down schedule, but how should we be assuming a similar level of kind of accelerated accretion in the fourth quarter is that while we gave it to you we laid it out for you there.
On the loan side of $17 billion right.
And that's our that's our best estimate right now tomorrow it could change based on.
Prepayment activity and stuff like that.
Got it great. Thank you.
Thank you thanks.
Your next question comes from the line of Laurie Hunsicker with Compass point.
Yeah, Hi, Thank you Lori morning.
Good morning.
Sure.
What was that and tangible common equity this quarter on a dollar basis.
Without <unk>.
No no just what was the ASC al drag.
Comment so the OCI in the third quarter impact was.
$688 million right.
After tax so.
That's an increase of about $242 million quarter over quarter.
Perfect perfect. Okay, Great and then Jonathan Glenn just going back to the $500 million sale and I. Appreciate you don't want to break out what what's legacy Webster versus legacy Sterling how much of that was office and then kind of what were the other larger components in there and then just a refresh on Opex right, we had last quarter.
With $2 2 billion of which 529 with in New York.
Alright.
I guess do you have a refresh on what that is as a thank you.
Sure sure I'm happy to do that so.
The impact on our office exposure.
Between the asset sales and other just general amortization and payoffs was about $75 million. So were $75 million lighter on total office exposure than what we had walked through and I'll refresh those numbers for you in the second and the rest of it the rest of the stuff related to kind of general C&I.
Activity in terms of the $500 million, So general C&I businesses.
I would say that.
If to refresh office, if you recall, there's not really a material change except for the $75 million or so reduction. So we talked about $2 $2 billion in total office exposure about a little over $500 million of which was kind of stabilized medical office, which has a much better operating profile and I think is.
Not.
Subject to paradigm shifts that would impact traditional office. So if you take that $1 seven remaining roughly.
About half of it is class a the other half is class B C, which is what we're focused on the most.
So again take the maybe 50 50 of the asset sales.
You're down to about $800 million.
In terms of BC office exposure, the total New York City office exposure in the five boroughs is around $400 million that remained largely unchanged.
And Thats about split 50, 50, a and then B and C. We haven't seen really a change in the underlying risk ratings classified content there, although we're not taking our focus off of it so and obviously evidenced by the fact that some of our discrete note sales were in that category Laurie.
But also again reminding you that we sold all of those loans at a at a combined rate of 98 cents on the dollar.
Werent selling loans with luck with identified loss content, we're just making decisions.
<unk> kind of eliminate non strategic assets that over time could have a lower value.
Got it okay, and just so that I'm clear I had in my notes last quarter $520 million with New York City, that's now down to $400 million.
Let me check maybe it's for.
Alright.
Oh I think medical is also in that Laurie So non medical office in New York around $400 million.
And at this time there are no further questions.
Great.
Thank you very much for joining us today.
And have a wonderful day.
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