Webster Financial Corp (WBS) 2021 Q2 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's Second Quarter 2021 Earnings Call. I will now introduce Webster's Director of Investor Relations, Kristen Manginelli. Please go ahead, ma'am.

Thank you, Melissa. Good morning, and welcome. Earlier this morning, we issued a press release to announce Webster Financial Corporation's 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. I'll now introduce Webster's Chairman and CEO, John Ciulla.

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 are always prepared should the path of the virus take an 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 with $2.3 billion in total loan originations. Transactional and total deposits continue to grow, and we entered the second half of the year with increasingly favorable and strong credit, capital and liquidity positions.

Our adjusted earnings per share in Q2 were $1.21, up from $0.57 a year ago. Our second quarter performance includes $18 million of pretax 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 CECL allowance release in the quarter.

Our second quarter adjusted return on common equity was nearly 14% and and the adjusted return on tangible common equity was 17%. Turning to Slide 3. Reported loans grew 0.8% 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, up solidly 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 by growth across our entire middle market franchise and sponsor and specialty verticals. 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 4. Deposits grew 9.5% year-over-year, while deposit costs continued to decline and were 7 basis points in the quarter. Commercial bank deposits were 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 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've seen more positive trends in our HSA business as we begin to return to pre-pandemic business activity levels. Core 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 growth of 11.8%. Total footings grew 19% year-over-year, supported by growth in investment balances. Interchange revenue at 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 $38,000 and $120 million, respectively, compared to the first quarter.

These TPA accounts, which we disclosed previously, continue to attrit 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 Jack Kopnisky and bankers across both organizations, we continue to reaffirm the complementary nature of our companies from a 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 a comprehensive integration plan, guided by 4 overarching strategic principles: One, value creation by delivering on the merger economics we set forth in April; two, customer first by focusing on client engagement and retention of customers and clients through the process; three, conversion and continuity by leveraging a positive and forward-thinking integration mentality; and four, risk mitigation by managing execution risk and delivering on a robust risk management framework.

We've established an integration office and named leaders to govern 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 17. We continue to expect the transaction to close early in the fourth quarter. 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 and 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 geographic footprint. With that, I'll turn it over to Glenn for the financial review and 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 begin with our average balance sheet on Slide 6. Average securities declined $55 million or less than 1% linked quarter.

Securities represented 26% of total assets at June 30. During the quarter, we purchased approximately $600 million in securities with a yield of 1.59% and a weighted duration of 5 years. Securities called, matured or paid down totaled around $500 million with a yield of 2.24%.

Average excess liquidity being held with 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 0.3%, linked quarter, primarily driven by $163 million in lower PPP loans.

During the quarter, forgiveness on PPP loans totaled $532 million. In Q2, we recognized $10.6 million of PPP deferred accretion and the remaining deferred fee balance totaled $31 million at June 30. 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 loan 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 30.

The common equity Tier 1 ratio decreased 24 basis points linked quarter to 11.65% driven by the increase in commercial and residential loans. Our tangible common equity ratio increased to 7.91% and will be 21 basis points higher, excluding $800 million and 0% risk-weighted PPP loans.

Intangible book value grew 2% linked quarter and 5.8% from prior year. Slide 7 highlights our GAAP performance and 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 $800,000 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 in PPP fee accretion, partially offset by lower funding costs of $1 million and 1 additional calendar day. NIM of 2.82% declined 10 basis points from prior quarter split between lower PPP fees and increased liquidity held at the Fed.

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 in 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 a decline in forward interest rate curves and lower mortgage banking fees, partially offset by higher deposit service fees.

Compared to prior year, noninterest income grew by $12.6 million. This reflects an increase of $5.6 million in deposit service fees, driven by 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 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, noninterest 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 -- pre-provision revenue was $125 million in Q2. This compares to $122 million in Q1 and $108 million in prior year.

Our CECL 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%, an increase of 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 an 8% to 10% reduction in core noninterest 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 10, I'll review the results of our second quarter allowance for loan loss under CECL. In the quarter, we reported $21.5 million benefit to provision and a $20 million reduction in the allowance. The allowance coverage ratio, excluding PPP loans, declined from 1.64% to 1.49% with total reserves of $308 million.

As we look at the trend from Q1 to Q2, we built $10 million in 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, reflect $1.2 million in net recoveries, largely driven by consumer from the strong housing market. Commercial classified loans, in the lower left, decreased $102 million from Q1 and represent a 262 basis points of total commercial loans. Improvement was driven by credit upgrades and paydowns within the Sponsor & Specialty and middle market businesses.

On Slide 12, we provide detail on payment deferrals related to the pandemic, which have declined across the board, down $121 million or 48% linked quarter and $182 million or 58% from year-end. At June 30, total deferrals represented 0.6% 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 12.28% exceeds well-capitalized levels by $980 million.

With respect to the third quarter, we expect average core loan growth, which excludes PPP to be approximately 2.5%, subject 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, 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, competence and enthusiasm. Their commitment has enabled us to continue to deliver for all of our stakeholders. With that, Luis, Glenn and I are prepared to take your questions.

(Operator Instructions)

Our first question comes from the line of Matthew Breese with Stephens Inc.

First question, maybe could you talk a little bit about the asset sensitivity of the combined institution? And I really want to get a sense for how much of the combined portfolio will be subject to floating rates and subject to floors.

Yes. So Matt, it's Glenn. So if you look at the combined organization, we're very similar from an asset sensitivity standpoint. And you can see back on -- in the back in the appendix, our asset sensitivity to arise in 50 basis points. If I look at it and I look at the floating and periodic basis, so total loans, say $41 billion, of that, I would say, about $26 billion is floating and periodic.

Now there are some of those that have loans or floors. So you probably back out about $4 billion, $4.5 billion of floors. And so that remaining piece, once you back that out, that's really what could be subject to the first 50 basis point move, say, in the rates. And that's where you would expect to get the asset sensitivity. I think the wildcard here is on deposit betas.

And so there's been -- the historical betas have been around 32%. I think that has come down. It's come down significantly. If you look at our asset sensitivity, we're showing a 6% increase in PPNR if we get the first 50 basis point move-in rates. And a lot of that's driven by our reduction in deposit betas. And so you see that's come down to like from 34% to 28%.

So I think that's going to be the wildcard as we begin to see rates rise. I think there'll be a lag and it could be anywhere from 0% to 15%, to be honest with you.

Great. Okay. Next one for me, just on HSA third-party accounts, the TPA accounts are rolling off slower than expected. I'm sorry if I missed it, but what's the remaining account balance that should roll off there? And what's the new projection for when that transition is complete?

So 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 in balances. And I think the account balance is 246,000 accounts. So it's on -- if you go back, Matt, and you look at our deck, you'll see that on Page 16, where we spiked out the TPA balances and the accounts.

So as John mentioned, there was about $120 million that moved out in the quarter, and that was about 38,000 accounts.

And Matt, just to remind you, we talked about that, it seems like 10 years ago, but it was third quarter of 2019. based on transaction, the WageWorks transaction with HealthEquity and another one 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's 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.

And then last one for me. I just noticed that in fee income, other fee income was down quite a bit quarter-over-quarter. It came in about $8.4 million versus $12.4 million last quarter. What was the driver of the decrease there? And anything onetime that you would point out?

Yes. So a big driver of that was the valuation on our customer derivative book, and that was driven by a lower forward curve on LIBOR. So what happens there is that the customer swap assets increase. And so the credit portion of that also increases. Now that's a valuation adjustment. I will point out that they 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 in that, particularly as rates have 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 a 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 and this.

Our next question comes from the line of David Chiaverini with Wedbush Securities.

So I wanted to touch on loan growth. It was great to see the rebound here in the second quarter. And I was 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 a** answer to that question, but I won't do it. Well, obviously, we're not pushing the envelope on structure or price too much. I will say the pricing environment is 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 1 million times on these quarterly calls, one 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 has just posted 10% organic loan growth on an annualized basis, year in and 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 of finance and our geographic middle market offices did really well and had strong originations. Our Sponsor & 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 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 RAROC 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? And well, clearly, a year ago, the pipelines were pretty bad. But can you talk about pipelines today?

Yes. 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 the 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 in the system as well as supply chain imbalances and 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 pickup in utilization, but still a good 5% to 10% on average below pre-pandemic levels.

That's great. That's impressive that you had such good growth with stable utilization rate. So that will be a nice tailwind going forward.

Thank you, David, and thanks for the comment.

Our next question comes from the line of Chris McGratty with Keefe, Bruyette, & Woods.

Kind of a question I asked on the Sterling call this morning was, did they sold some loans that were deemed higher risk into the close. Is there anything, given the liquidity in the market is pretty high, is there anything on your balance sheet that might be kind of write for pruning before you consummate the merger?

I would say no. Strategically, that there's nothing really in our book that we think we would want to sell right now. We have sold off nonperforming consumer loans at times where we thought the economics were right and we didn't have to carry them, obviously, because they're a drag in a longer-term lookout. But there are no pockets, Chris, in our balance sheet right now that we're eyeing loan sales in.

I note interestingly, because I wanted to get this in, 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 it goes to show how much liquidity is in the system and what government stimulus has done, but we were even surprised by that outcome.

Okay. That's a great development. On the merger call, you were, I think, pretty confident about just the pro forma growth opportunities of the company. this quarter would certainly give credit to 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 jointly on that call, our expectations of loan growth for 2021, individually, and on a combined basis kind of in that 4% to 5%. And we talked about the fact that the second half of this year could be still muffled loan growth because of how much liquidity was in the system.

Obviously, we reported higher loan growth, as did a couple of our peers. And as we head into '22 and '23, 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, absent some kind of real change with the delta virus. I think this quarter certainly gave us additional confidence in our ability as we move forward to hit those numbers in '22 and '23 on a combined basis.

Okay. That's great color. I just wanted to make sure I understand the guidance for -- real quickly on for the quarter. The net interest income stability comment, is that GAAP or is that excluding the PPP?

No, that's GAAP. So 220.92, about the same range.

Okay. And what -- I missed the PPP. What was the -- in the quarter, the contribution and what's 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, it's about 1/3, 1/3, 1/3 that we are expecting from a forgiveness standpoint. So about $10 million a quarter in the next 3 quarters.

And then lastly, the expenses and fees, the expenses -- the pace came down quicker than I thought. Is this the kind of the range that the fully optimized like $167 million, $168 million that the 8% to 10% implies?

No. We, as we showed on the slide, I mean, our objective. And we feel very confident to get down to that $164 million on a core expense run rate. And so there's more that will come along off of the second quarter.

Okay. And the fees we're 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.

I think -- whether your comments -- stable fee income kind of going forward in the third quarter?

Yes. Yes. Yes, stable fee income. And that's -- So I'm assuming that the forward curve in the case of credit valuations stay about stable.

Our next question comes from the line of Brock Vandervliet with UBS.

Maybe for those of us that are 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 might help us kind of dimension the growth rate of the combined?

Brock, first, it's good to hear from you, and thanks for the question. I would say, no, strategically, right now, and the work that we have done since -- after diligence since announcement has just confirmed this, that I think all of the business lines that 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 management framework and Me and Jack and Luis and Glenn will continue to look at risk-adjusted returns. We look at opportunities in the marketplace, we'll look at pricing and competitive dynamics to look at our position in the league tables and whether or not we can matter in certain asset 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 is really helpful because you don't have to press on credit quality, you don't have to press on price in any one 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 that are aggregated between the 2 banks.

Got it. Okay. And I think we've got a good sense of the loan trends. On the funding side, in terms of deposits, anything you would highlight in terms of trends, average to end of period? Is the liquidity wave here in the process of breaking or -- how would you characterize that?

We haven't seen it break yet. So average consumer balances, average commercial balances, municipal balances, which, by the way, haven't even seen the peak of their tax collection season. They're all significantly above average, long-term and medium-term average trends. So our expectation is that we'll 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 liquidity, both individuals and businesses as they move towards more purchasing activity and more investment.

Our next question comes from the line of Jared Shaw with Wells Fargo.

This is Timur Braziler on for Jared. 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 our 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 and the borrowers' balance sheet, to what extent is that 8% to 10% longer-term loan growth guide a matter of borrowers, first, working through their own liquidity before really getting into the borrowing base at a more normalized level?

Yes, it's a great question, Jared ( sic ) [Timur]. And I'm not sure I can give you a really detailed response. Most of the growth or origination, for instance, in commercial real estate and Sponsor & 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 regulatorily leveraged, but they're not dealing with lots of liquidity. They're using debt to acquire companies, and so there's not that immediate offset when they borrow their cash or their cash comes out or they're 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 you're 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, they'll draw higher 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 self until you start to see some of the companies and borrowers draw down on their liquidity. But I don't -- I wouldn't say this quarter, we saw kind of an offsetting activities in deposit account balances and drawdowns on lines or the deployment of term loans.

Okay. That's good color. And then maybe looking at the Sterling integration and 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 have broken it down based on technology, back office and kind of corporate facilities in the past.

Is that a, seems still realistic; b, is there a potential to upsize that; and c, I guess, again, maybe going back to an 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 deal close?

Yes. I would say answering your latter question, first. I wouldn't comment on any kind of activity, balance sheet activity 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 we're handing out for people to hit are right in line with what we talked to the market about on April 19. And I think that's the appropriate level of efficiency and the appropriate cost saves to be going into this combination together. And remember that, that cost save amount 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 the strategic initiative and merger-related adjustments, can you just provide the line items that, that how it has been?

So it's primarily in professional fees. Timur, it's Glenn. That is all primarily in professional fees. I think the case that's relative to the initiative is more spread out in other and lease line, but it's smaller amounts. So the biggest part of that $18 million is in professional fees.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Ciulla for any final comments.

Thank you very much, Melissa. We appreciate everyone joining today. Have a great rest of the summer.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.