Webster Financial Corp (WBS) 2022 Q1 法說會逐字稿

Good morning. Welcome to the Webster Financial Corporation's First Quarter 2022 Earnings Call. Please note, this event is being recorded.

I would now like to introduce Webster's Director of Investor Relations, Emlen Harmon to introduce the call. Mr. Harmon, please go ahead.

Good morning. Before we begin our remarks, I want to remind you that the comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. The presentation accompanying management's remarks can be found on the company's Investor Relations site at wbst.com.

I'll now turn it over to Webster Financial's CEO, John Ciulla.

Thanks a lot, Emlen. Good morning, everyone, and thank you for joining us for our first quarter earnings call. It was an eventful quarter as we closed our merger of equals with Sterling, executed on our integration plan and announced and completed the acquisition of Bend Financial, all while continuing to generate solid performance in our underlying businesses.

I'll begin with some high-level remarks on the macro environment, our performance for the first quarter of '22, and I'll provide a quick update on the merger. I'll turn it over to Glenn after that to review our financials, the financial effects of the merger and to provide our outlook for full year 2022. Despite uncertainty in the macroeconomic environment, driven by war in Ukraine, supply chain, labor market challenges and the lingering impacts of COVID, and some of you may have seen the 1.4% surprising GDP contraction this morning, we feel that the underlying strength in economic activity remains strong. Demand for debt financing and continued confidence among our clients is prevalent, and our base case continues to call for solid economic growth, rising interest rates and positive trending in loan demand over the next 6 to 8 quarters.

We are very pleased with our performance in Q1. Our reported net income was a loss of $20 million and EPS was a loss of $0.14. These results, however, were impacted by various onetime merger-related charges, including the non-PCD double count provision for Sterling. Excluding these merger-related expenses, adjusted net income was $184 million and adjusted earnings per share was $1.24. Those adjusted metrics equate to a 1.37% return on assets and a return on common tangible equity of 17%. Loans and deposits grew smartly year-over-year, driving material revenue growth. We effectively managed expenses, and our efficiency ratio was approximately 49% for the quarter.

Credit performance continues to be favorable. Excluding the non-PCD provision included in the merger accounting, our provision for the quarter was $14 million. All credit metrics remain strong, including our NPL to total loans ratio at 57 basis points period end, down from 71 basis points for stand-alone Webster a year ago.

I'm now on Slide 3. We closed our merger on January 31. We're excited to be operating as a combined organization and believe our combination is strategically compelling today as it was when we announced it a year ago. We now have $65 billion in assets, $54 billion in deposits and $44 billion in loans as a combined company. As was our intent at the outset, we have created a commercially focused bank that we believe can outperform as we leverage our significant expertise, industry verticals and broad asset generation capabilities.

Our funding and liquidity profile is a differentiated strength for Webster as our diversified sources of low beta deposits, including from our HSA Bank franchise, should provide a competitive advantage as interest rates rise and liquidity returns to more normalized levels. Our loan-to-deposit ratio of 80% provides ample flexibility for us going forward. In combination with the predominantly floating rate loan portfolio, we expect significant income improvement in a rising interest rate environment.

Our tangible book value per share and capital levels at close were roughly in line with our expectations at merger announcement. We expect to achieve $60 million in realized cost saves in '22 and another $60 million of savings for the full year '23. We've begun the consolidation of our corporate real estate footprint and expect to reduce our combined corporate square footage by over 40% by the end of the year. We've eliminated redundant operating costs where identified. And at quarter end, the combined organization was operating at 93% of its head count relative to merger announcement a year ago. We expect to complete the core banking systems conversion in the third quarter of 2023. All customer-facing rebranding has been completed.

In combination with the financial merits of the deal and strong business execution, we are well on the path to sustainably generating the targeted financial metrics we set forth a year ago at deal announcement, including a high-teens return on tangible common equity. With respect to our outstanding people, we have seen effectively no attrition among client-facing colleagues due to the merger or the competitive labor market. And in fact, we've added additional commercial bankers and have a pipeline of teams and portfolios that we believe will help us sustain our growth momentum.

Slide 5 covers loans. We have great business momentum heading into the second quarter. Excluding the effects of PPP and the material contraction in mortgage warehouse balances due to the rate environment, linked quarter loan growth for the 2 legacy entities combined was 1.5% or 6% annualized. Year-over-year growth on the same basis was 8.5%. Growth was driven primarily by commercial categories as anticipated.

As we have discussed with many of you, our increased balance sheet capacity allows us to immediately expand relationships with our existing customer base. As a proof point, at year-end 2021, the combined banks had a total of 109 relationships with exposure greater than $40 million. With a bigger balance sheet, since legal day 1 of the merger on January 31, we've prescreened 61 deals and approved 27 deals with exposures over $40 million. These higher hold trends contribute to our confidence in reaching our 8% to 10% 2022 full year loan growth targets. We feel good about our ability to leverage our bigger balance sheet without sacrificing credit quality and without expanding our existing underwriting guidelines. Of note, the weighted average risk rating of our top 100 exposures is more than half a turn better than that of our overall loan portfolio. Asset quality improves as hold levels increase.

Deposits on a combined basis also exhibited solid growth this quarter, up 3.2% on a linked quarter basis and up almost 4% year-over-year. Our deposit cost declined 1 basis point despite the start of Fed tightening and higher market rates broadly. Growth this quarter was principally driven by HSA and our government banking business. HSA added 288,000 new accounts and core deposits increased almost $0.5 billion. As mentioned earlier, we closed on our acquisition of Bend this quarter, which we view as another proof point with respect to the merger, providing additional opportunities to accelerate growth in low-cost, long-duration HSA deposits.

With that, I'll turn it over to Glenn.

Thanks, John, and good morning, everyone. Let me start with our period-end balance sheet on Slide 7.

At period end, our total loans were $43.5 billion, total assets were $65.1 billion and total deposits were $54.4 billion. On a pro forma basis, linked quarter loan growth was led by $442 million in Sponsor & Specialty and $255 million in C&I. This was partially offset by declines in mortgage warehouse and PPP. Pro forma deposits increased $1.7 billion or 3% linked quarter, with growth across all categories, except higher-cost CDs. Borrowings ended the period at $1.6 billion.

Capital ratios continue to be exceptionally strong post-merger with a common equity Tier 1 ratio of 11.4% and a tangible common equity ratio of 8.3%. At merger announcement, we had estimated a pro forma common equity Tier 1 ratio of 11.3% at close. Tangible book value per common share was $28.94, down from $30.22 last quarter. A number of factors contributed to that decline, including merger accounting, merger-related charges and the impact of AFS securities valuation marks on AOCI.

Moving on to Slide 8. We detail the various merger and restructuring adjustments for the quarter, including a reversal of accrued strategic initiative expenses, merger-related expenses and the non-PCD double count provision. In aggregate, these 3 items subtracted $1.38 from EPS for the quarter.

On Slide 9, we provide our reported to adjusted and pro forma income statement, which includes the January adjusted results for Sterling. The January Sterling performance is excluded from our reported results as it occurred prior to the closing of the merger. On an adjusted basis, we reported $184 million of net income available to common or $1.24 in diluted earnings per share in the quarter. Our pre-provision net revenue was $242.9 million. Our return on assets was 1.37%, return on tangible common equity was 17% and we had an efficiency ratio of 48.7%. I will point out that our adjusted performance benefited from the deferred tax valuation adjustment of $10 million in the quarter, which is reflected in the effective tax rate of 18%. As John highlighted earlier, we feel very good about the trajectory of our returns given where we are in the integration process.

On the next 3 slides, we have provided trends on pro forma income statement categories to give you a better sense of the starting point as we head into the second quarter.

Slide 10 shows our net interest income for the quarter. $464 million in total net interest income includes $394 million reported for Webster and $70 million for Sterling in January. This includes $36 million in purchase accounting accretion. The pro forma net interest margin for the quarter was 3.24%, while the net interest margin, excluding the effects of purchase accounting, was 2.98%.

Noninterest income is presented on Slide 11. Noninterest income is again presented on a pro forma combined basis, including Sterling's January noninterest income. When combining Webster's reported noninterest income of $104 million for Q1 with $11 million for Sterling in January, the total is $115 million. The linked quarter decline from Q4 reflects lower investment gains of $11 million realized at Webster and $5 million at Sterling. In addition, we recognized lower wealth management and mortgage banking fee income.

Noninterest expense is presented on Slide 12. Webster reported $255 million in adjusted expenses and Sterling's January adjusted expenses were $46 million, which totaled to $301.5 million. On a linked quarter basis, the general trend in noninterest expense was driven by a decrease in Q4 performance-based expenses, which was partially offset by seasonal benefit expenses and intangible amortization. Total intangible amortization on a pro forma basis was $4.9 million in each of the prior periods compared to $7.5 million in Q1 2022.

Moving on to our allowance on Slide 13. The allowance totaled $569 million for the quarter, largely driven by merger-related accounting. The net PCD allowance for Sterling added $88 million and was marked through the balance sheet. The PCD allowance adjustment is the net of $136 million in gross PCD reserves, less $48 million in charge-offs recognized at acquisition, reflecting balances written off by Sterling in prior periods. The non-PCD provision added $175 million. In accordance with purchase accounting, this is recognized as a provision through the income statement and is commonly referred to as double count -- as the double count as the assets are both marked on the balance sheet and income statement. The balance of our increase was the net effect of $9 million in charge-offs and $14 million provision expense.

Slide 14, we provide our key asset quality metrics. As John indicated earlier, our asset quality remains strong, including an NPL ratio of 57 basis points and the commercial classified loans totaling 213 basis points of the commercial portfolio. This compares to 62 basis points and 226 basis points, respectively, on a combined basis at year-end.

On Slide 15, we are exceptionally well positioned from a capital perspective. Our regulatory capital ratios exceed well-capitalized levels by substantial amounts. Our common equity Tier 1 ratio of 11.4% exceeds well capitalized by $2.4 billion, and our Tier 1 risk-based capital of 12% exceeds well capitalized by $1.9 billion. Our tangible book value per share of $28.94 is up $0.53 from prior year.

Slide 16 provides our estimated purchase accounting marks at close relative to expectations at merger announcement. Loan marks totaled $317 million compared to $381 million anticipated at announcement, including marks related to credit, interest and liquidity. Our security mark of $60 million is lower than the originally anticipated mark of $102 million, driven by the higher rate environment. The core deposit intangible is estimated at $119 million versus $106 million at announcement, again driven by higher rates. We've also added $91 million of intangibles for customer relationships related to reoccurring revenue portfolios in our commercial bank segment. The property and equipment mark was $23 million. Goodwill and other intangibles totaled $2.1 billion, in line with the announcement.

On Slide 17, we have provided the expected income statement impacts of the merger. In accordance with acquisition accounting, Sterling's previously scheduled yield accretion and intangible amortization are eliminated. In the first quarter, we realized $34.7 million of purchase accounting accretion in net interest income. Our scheduled accretion for the calendar year is $73.5 million. In the first quarter, purchase accounting accretion benefited the net interest margin by 29 basis points. With respect to intangible asset amortization, Webster reported $6.4 million in intangible amortization in Q1, which includes $5.2 million related to the merger. Total intangible amortization will be $9 million for Q2, including the full effect of the merger and legacy amortization.

On Slide 18, we provide our full year outlook. Each of these items assumes no material change in the macroeconomic or regulatory environment. We expect net interest income of $1.85 billion on a GAAP basis, excluding accretion. Our projection assumes the Fed funds rate ends the year at 2.5%, implying an additional 200 basis points of rate increases. Our net interest income projection also anticipates loans grow at 8% to 10% annually, beginning from our legal day 1 balances of $43.3 billion. We expect fee income of $430 million to $450 million and expenses, excluding onetime costs, of $1.1 billion to $1.12 billion. So we continue to monitor inflationary headwinds. We anticipate an effective tax rate in the range of 22% to 23% going forward.

With that, I'll turn things back over to John for closing remarks.

Thanks, Glenn. When Jack Kopnisky and I decided to embark on the merger of our 2 companies, in addition to the financial merits of the transaction, there were several aspects to this merger that made it particularly compelling, including the ability to elevate the best talents from both organizations, the alignment and complementary nature of the lending verticals, a uniquely valuable funding base and scale that would allow us to accelerate investment in differentiated businesses.

Already in the first few months as a combined company, we are executing on the strategic benefits we felt this merger would provide. We're elevating the best talent from both organizations. The executive management committee is a balanced group coming from each legacy organization. We're committed to building a contemporary and values-based culture in the new organization. The leadership team is coalesced around an agreed-upon set of core values and respected behaviors. These have been formalized into a culture shaping program already rolled out across the bank. Our company and our colleagues are committed to outstanding corporate citizenship, and I encourage you to read our recently published ESG report available on our website.

As previously highlighted, we had solid loan originations and net loan growth in key commercial segments, and we are immediately realizing on the ability to execute on larger transactions, particularly on our differentiated Sponsor & Specialty and institutional commercial real estate business. We have an exceptional low-cost sticky deposit base led by HSA Bank and the consumer banking network of the combined organization. We were able to reduce our cost of deposits by 1 basis point this quarter and continue to explore new customer verticals and digital delivery channels that should further enhance our funding position.

We're investing in digital capabilities. We saw a couple of examples in the first quarter. As previously mentioned, we purchased Bend Financial, a cloud-based solutions provider in the HSA space. We're excited about the technology Bend brings to our platform and the business benefits its client-facing experience will provide. In addition, through our innovations group, Webster joined the USDF Consortium as a founding member. The consortium will work to support like-minded, forward-thinking banks as they work to integrate blockchain capabilities into their operations. As an active and engaged participant in the Consortium's activities, we will benefit from the pooled expertise and network effects of other members. We will continue to invest in our data environment and migrate our digital platforms to the cloud.

We expect to generate significant returns and excess capital as a combined organization as we set forth at the merger announcement a year ago. This will provide us with significant capital flexibility going forward. We'll continue to be disciplined in our capital management framework, allocating capital to those businesses and activities that generate the highest return on equity. We will deploy capital into differentiated and growing organic activities first and into commercial loan portfolios and select inorganic business or product acquisitions, like we did with Bend.

We'll also continue to return capital to our shareholders in the absence of organic opportunities through dividends and share repurchases. In Q1, we repurchased over $120 million in shares and have replenished our repurchase authorization as announced yesterday.

Finally, I want to thank all of our Webster colleagues for their engagement, effort and execution. We've asked a lot of every colleague over the last year as we were preparing for the merger close and delivering outstanding performance in a challenging macro environment. Our colleagues stepped up and delivered for our clients, our communities and for our shareholders.

With that, Glenn and I are prepared to take questions.

(Operator Instructions) Our first question is from Chris McGratty with KBW.

Glenn, maybe starting on the expense. The guide was pretty much in line with what we were looking for. I'm just interested in kind of the cadence as you realize the $60 million of cost saves this year and $60 million next year. Where do expenses effectively go to over the next 4, 5 quarters, and then we lift from there once the synergies are realized?

Yes. Thanks, Chris. Let me just give you a little more texture on the $60 million because I can say we have pretty clear sight on how we're going to achieve that. And it sort of falls in 3 categories: the elimination of redundancies; the consolidation of corporate facilities, as you probably heard John, John note in his remarks, a 45% reduction in square footage; and then operational efficiencies from the consolidation of vendor contracts, operating systems and automation.

So we gave you guidance that sort of gets us to $1.1 billion to $1.12 billion. And I would say that trajectory is probably going to get us to a range in the range of like [2 85] by the fourth quarter. I want to sort of preface that with that in the fourth quarter, we have basically -- we do traditionally have a spike in HSA type of expenses, somewhat offset by lower employee comp-related costs on the health care and things like that. So it's -- that's a range, I would say, that would be a jump off range in the fourth quarter.

Okay. And then from there, there's still a little bit more, I guess, to go for 2023, but there's always -- there's also inflationary pressures. So...

So look, we're sticking with achieving the additional $60 million in 2023. The big driver of that will be the completion of our core banking conversion, which will generate significant savings. And then we'll -- as you would expect, we'll get a full year run rate of a lot of the initiatives that we executed this year.

Okay. And then if I could, just one more on the margin. The expansion was a little better than we thought. Can you -- given the challenges of 2 months in the quarter, can you just provide like what the March core margin was for a lift off for Q2?

Yes, it's 2.98%.

2.98%. That's the month of March? Okay.

Ex accretion, right?

All right.

Our next question is from Casey Haire with Jefferies.

I wanted to touch, I guess, Slide 5, the loan growth, obviously, a little bit slower this quarter. But I guess, can you just give us some color on the mix? Lots of moving parts here, C&I very good, Sponsor & Specialty also very good. What -- is this a similar mix that we can get -- expect in the remaining quarters to get to that 8% to 10%? And then also what is Sponsor & Specialty, I know, John, you really love that vertical. What is the limit on that concentration-wise?

Yes, great question, Casey. And you can probably hear that -- obviously, the contraction in mortgage warehouse and runoff of PPP is what sort of muted the GAAP reported loan growth. But obviously, for me, the underlying characteristics on Page 5 are strong because the proof point on this transaction was in our institutional real estate, C&I and Sponsor & Specialty that we had a lot of momentum. And with a bigger balance sheet, we were going to be able to accelerate loan growth, and that's why I'm still pretty confident. Mortgage warehouse is about $500 million in balances right now. We don't see that contracting much more during this kind of purchasing season. And kind of our general thought is that $500 million would be a good average balance for that business for the rest of the year. So neither a big driver of growth, nor a drag.

But as you noted, our originations were really strong across C&I, Sponsor & Specialty and actually in CRE. We just had an inordinate amount of prepayments it sort of spilled over from the fourth quarter in investor CRE. So a lot of momentum there. And I think as we talked about when we announced this deal, our Sponsor & Specialty business on our $20 billion loan portfolio as a stand-alone legacy Webster company, we were sort of saying to ourselves, hey, are we reaching maybe a threshold of concentration?

And now -- and on the other side, from a legacy Sterling perspective, we -- they had a relative concentration in Commercial Real Estate, you look at this $43 billion loan portfolio and the granular nature of all these categories, we really have significant running room to expand in all these categories. So that 11% growth in a single quarter in Sponsor is terrific. Again, some of that was because of lower prepayments. I wouldn't pencil that in.

But we expect general C&I across all the middle market businesses, investor CRE and Sponsor & Specialty to continue to grow smartly from a good pipeline, stronger loan demand and the bigger balance sheet. So that's why I think the underlying numbers here from a loan growth perspective are not discouraging because of the geography of what sort of muted the growth.

Yes. Okay. Great. And then the -- on the buyback, you guys announced a $600 million renewal last night, ahead of that -- $120 million in the quarter, ahead of that $400 million or so expectation at deal announcement. Can you just give us some updated thoughts on your buyback appetite going forward?

Sure. I think we're going to continue to be disciplined and opportunistic. The environment is a bit choppy. Obviously, we had the increased authorization, which makes sense given the size of our company and moving forward. And as I articulated, I think first prize for us is outsized loan growth, portfolio purchases, team lift outs, opportunistic product enhancements for companies like -- for activities and divisions like HSA Bank. But obviously, we look to, say, a 45% to 65% payout ratio. We pay a pretty robust dividend. And if we don't have line of sight to organic investment and we don't feel like there's a recessionary environment right in front of us and we feel pretty confident, we'll certainly use some of that authorization to buy back shares over the course of the next 3 to 4 quarters.

Okay. Very good. And just last one for me. Glenn, Slide 26, the asset sensitivity slide, you guys pointed out a 20% beta over the first 12 months of the forecast. Does that hold for 100 bps of hikes and 200?

So we have increased that. If you recall from the last call, we were sort of in the 11% range. I think that's something that we have to look at. And we're using 21% right now. I think we do have a ramp up toward the end part of the year. The wildcard here, Casey, is if the Fed goes 50 and 50, I think it may spike up. But what we're using in our model right now on a full year basis, 12-month ramp-up basis, is like 21%.

Okay. And that would -- and that holds for 200 bps as well or just 100 bps?

Yes, it does. It holds for 200 as well.

Our next question is from Steven Alexopoulos with JPMorgan.

This is Alex Lau on for Steve. As you guys integrate the 2 companies together, what are some of your more immediate revenue synergies that you're targeting? And beyond that, what are some of the larger opportunities that will take more time for revenue synergies?

Yes, that's a great question. I think the immediate ones I've already referenced, which is larger balance sheet to be able to have more profitable and larger relationships with our existing commercial clients, potentially more capital market fees depending on market conditions. So that scale of balance sheet and our existing penetration in key commercial categories is kind of the immediate revenue synergy. There's obviously more cross-sell opportunities. For example, our Private Bank -- legacy Webster Private Bank selling into the commercial portfolio at legacy Sterling is an immediate opportunity to get more penetration in wealth management as we have broader products and services to sell into and to deliver to our clients across a bigger footprint.

On the long hand side, it's a lot of exciting things because we're working through our innovations group to think about ways we can digitally serve 3 million retail clients at HSA Bank and digitize other products. So we feel -- we're spending a lot of time on our longer-term strategies around are there opportunities to digitize and sell cards or short-term loan products into HSAs. Can we use our bigger balance sheet and larger corporate relationships to leverage more sales of HSA -- of our standard and basic HSA products into a larger corporate client base at Webster. So I think immediately, what you'll see is in our core commercial relationships, broader, deeper, more profitable relationships and over the long term, our ability to create more cross-selling products across the bank and HSA through innovation and digital products.

And one question on the HSA business. So coming out of the pandemic, can you talk about the HSA business and if you're seeing some return to normal for that business, such as for balance growth and fee income?

Yes. Another great question, Alex, and we have. Not back to pre-pandemic levels, but there was muted activity. You probably heard us over the last several calls talk about one of the dynamics was that most of the deposit growth and account growth came actually from existing clients. So further penetration into existing clients. That sort of waned a little bit as general activity slowed during the pandemic. As you heard me mention in my script, we had 288,000 new accounts. And obviously, net account growth reported was a little bit muted by the TPA accounts still running off, but that was an increase over last year's account growth.

And so that was healthy. Almost $0.5 billion in new core deposits, which was also a positive trend line. And what we did see underlying that was more of our existing clients, we're signing up new employees to high deductible health plans and HSA accounts. So I'd say that's trending in the right direction towards pre-pandemic levels, and I think we saw the same thing as well in our card swipes and activity just from discretionary health care activities and the like. So definitely encouraging, not yet back to where we'd like it.

Yes. Let me just add a little color. On the [data] transactions, as an example, I think we did 6.9 million in the quarter. That's versus 6.4 million. So that's -- the transaction volume is up year-over-year, a little over 8%. So we are seeing some of that on a like-quarter basis prior year.

Our next question is from Brock Vandervliet with UBS.

Just to follow up on the HSA questions. I noticed the on-balance sheet deposits -- your off-balance sheet funds are growing significantly faster. Is that the kind of mix we should see -- we should expect going forward? And can you compare the economics of the two?

Sure. I'd be happy to. We talk about this a good amount. So the answer is the trend line, obviously, while overall penetration in the investment category is still relatively low, it's increasing, but relatively low, obviously, the larger balance accounts are the ones that transition into investments. And obviously, when you look at that number, there's also the benefit or detriment of market performance that moves that around. And so obviously, over the course of the last year, there was significant expansion in the value of those investments as well as more people going into those investments. It's no secret and we're very transparent about the fact that for us, and I'd say, particularly in a raising -- rising interest rate environment, the deposits are more valuable to us because we get the full benefit of the value of those deposits to deploy directly into loan and asset growth.

And with respect to the investments through our -- both our proprietary offering and [debonair] and our other vendor, we only get really 12b-1 fees from that. So we're talking somewhere between 10 and 30 basis points depending on which avenue that runs. And so it is less profitable on its face. However, what we've always said is the investors in our HSA client base tend to have high average deposit balances as well and tend to be among our stickiest depositors. So we obviously want to provide our clients with as much flexibility as we can there. So I think at the end of the day, there's a nice virtuous cycle that allows us to keep deposit growth running. Albeit, dollar for dollar, it's not as profitable.

Got it. Okay. And as a follow-up, can you give us sort of a level set range, assuming relative stability, not a recession ahead, in terms of net charge-offs, net charge-off range for the combined company going forward?

Yes. That's -- it's a tough one. I've been surprised, as you know, as a former credit guy, about the way credit has performed even leading up into the pandemic period. I would say we were experiencing that kind of 20 basis points, give or take, annualized net charge-off before the pandemic. I think that if you think about commercial categories, if there ever is kind of a return to normal, maybe think about that 20 to 30 basis point annualized charge-off rate as more of a normalized commercial charge-off rate. And obviously, we still haven't seen it. There's been a lot of stimulus and other reasons why. But that's probably in our minds where we think it would normalize on a commercial basis.

Our next question is from Jared Shaw with Wells Fargo Securities.

Maybe starting with the NII guide. Does that assume sort of a stable mix of loans and securities and cash from where we are right now? Or is that loan growth accelerate, should we assume that a lot of that's funded or some of that's funded out of cash and securities?

Yes. So it assumes somewhere between 8% to 10% loan growth. So you could say 9% right in the middle. It does assume that part of our -- some of our securities portfolio will help fund that. But I think all in, that's where we are. So there's some borrowings as well that you would expect to see. We are not -- we are -- we have drawn down our cash levels, as you know, for the last couple of quarters. So our securities portfolio is about $15 billion. So as we now reach the phase where we'll start to realize that loan growth, you'll probably see the securities portfolio start to temper down a little bit.

Okay. Okay. That's good color. And then what was AOCI on a combined basis at quarter end?

So the total AOCI?

Yes.

From securities?

Yes, please.

So the impact of the securities, if that's what you're looking for, the impact of the valuation securities, after tax, $240 million. And so that impacted -- we started out -- I mentioned the tangible common equity ratio of 8.26%, really strong. That includes that 40 basis point reduction from the unrealized loss on the AFS portfolio.

Okay. Okay. That's great. And then when we look at the accretion this quarter, what were the -- you had mentioned the accelerated paydowns, I guess, on CRE. What was the actual balance of paydowns and was that more than you were expecting?

So it was about $15 million in accretion impact, as I think I mentioned in my comments. I'm not sure that we had the balances associated with it. Jared, I'll have to circle back with you on the actual loan balances that prepaid on.

Okay. That's good. And then just finally for me, so following up on Brock's question about the charge-offs. What's the expectation for the ratio of the allowance for credit loss as we move forward? Is there still a larger qualitative reserve tied into that? Or are we sort of good with that given the [current]?

Yes. So we're at 1.31% coverage, and I think we're expecting like a stable ACL ratio. And we'll continue to monitor credit quality and macro, loan mix, loan growth as well. I think John hit on it in some of his comments, there is a qualitative portion, and we're being somewhat conservative on that until we see how things play out over the next couple of quarters.

Yes. I think that's spot on. I think we feel really good about the reserve, as Glenn said. Another way to say we think it's relatively conservative. I think there is enough choppiness going forward that it's the right reserve level now. But if we do see some of the uncertainty going forward, the war and some of the other choppiness kind of settle down, we do think there may be an opportunity to lower that reserve a bit.

Our next question is from David Chiaverini with Wedbush Securities.

You mentioned at the outset about the economy contracting. And a question I always seem to get whenever recession enters the narrative related to Webster is your leverage loan exposure. Could you talk about what the exposure is there? And any details you can provide to giving investors comfort related to historical loss rates, leverage multiples, equity contribution by private equity sponsors to provide cushion for you guys. Can you rattle off some stats there?

David, you love to ask me that question. I could stay here for the next hour and talk about it, but I promise I won't. And I weaved in that contraction in the GDP from one of my colleagues here last minute because it wasn't in my script, but I didn't want to seem like we were blind to what was going on. One of the other reasons we talked about, another benefit of doing this transaction and having a bigger balance sheet is that, again, from a concentration perspective, it gives Sponsor & Specialty more running room under a prudent portfolio approach to management to the way we manage it.

So I will tell you that as of quarter end, our kind of regulatorily defined definition of leveraged loans was a roughly 6% of the entire loan portfolio of the organization, with like credit performance to the rest of the portfolio. As we've said before, that's kind of held historically through both the Great Financial Crisis, through the pandemic. And that while there may be volatility in risk rating at times, it really -- it performs at or better than the rest of the portfolio, and it goes to some of the things you're talking about.

We feel like we're not involved in kind of -- not that much involved in market-level, large syndicated deals. We have a lot of really good long-term relationships with private equity sponsors. We tend to play in areas that have repeatable, protectable, predictable cash flows like our technology group, like our data center and infrastructure group, like our health care and health care services group. So they tend to be companies that during normal cycles actually have predictable cash flow. And obviously, during the pandemic, those did well. We don't do a lot of covenant-lite transactions.

And you are right to say that one of the benefits in these deals is there's a lot of cash equity underneath your senior debt. So it takes a real paradigm shift in any company's performance to have the private equity firms say, hey, we're out of here or we want to give you the keys. And so we tend to work with these private equity firms for literally more than 20 years in some cases and have a really good relationship where the senior debt and the equity work to get to great outcomes. And so it is enterprise reliant. It doesn't have hard collateral underneath it, and I think that's why sometimes the market always asks the question. But I think we've had a long and durable time to kind of validate our strategies and underwriting in that area. And again, it's 6% of a $44 billion loan portfolio. So it's also rightsized, I believe, where we are.

Very helpful. And then shifting over to -- you guys spoke about the USDF Consortium. I was curious, can you talk to the opportunity there, particularly on the deposit front?

Sure. Let me take a step back. So we're excited about this innovations group. We have a great leader there, Bea Ordonez is there, the former CFO of Sterling. And the group, we're looking at a number of things there in terms of banking as a service and including the direct bank activities and this Consortium around distributed ledger and blockchain. The reality is, from an analyst perspective, it's not a significant drag on expenses, and we don't really have any built-in revenue in the short term.

What our goal is ultimately is, I guess, twofold, which is to help augment our existing businesses through digital strategies and the like, obviously, to look to continue to digitize consumer and retail banking, try and discover an effective and efficient way to get to new profit pools, and then, for example, on the consortium and distributed ledger, apply it to a lot of use cases. So you could think of end-to-end process in correspondent mortgage or you can think of trading and storing loans on chain, you could think of 24-hour cheap, effective and efficient payment strategies.

As it relates specifically to the Consortium, there's going to be a little bit of a slow walk as we work with the other banks, as we work with the technology providers and we work with the regulators, quite frankly, on kind of moving forward. So it's all of those use cases I just mentioned, but the expectations are that we won't see immediate and direct benefit just because of kind of the nature of the development of the technology, the figuring out all the risk aspects and also working through the regulatory landscape. So a lot of exciting things that we think will benefit us 2023 and beyond. But from a 2022 perspective, it's not factored into our financial statements.

Our next question is from Matthew Breese with Stephens Inc.

I want to go to the NII guide, the $1.85 billion for the year. Given expectations for higher rates and the asset-sensitive balance sheet, could you help me with the exit rate of core NII in the fourth quarter? It feels like it should be north of $500 million, but curious your thoughts and maybe you can help me hone that down.

You're looking for the exit rate of net interest income in the fourth quarter?

Exactly.

Yes. So I'm not going to be real prescriptive, but it is in the range -- slightly above the range of $500 million. So I'd say in the range of $545 million to $550 million, I'm going to use that.

Great. Okay. And then what are the blended new loan yields you're putting on the books today, commercial real estate, traditional C&I? And then oppositely, have you started to feel any pressure even exception-based pricing on the deposit front at all?

So on the deposits, not really maybe a few select circumstances on the government side. But otherwise, no, that's easy. I'll take the second question first. And then the first question is on rates and spreads. As it's always been for, I think, both legacy organizations, we try and remain pretty disciplined. But there is some variability as you go through the different asset classes. So I would say I'm looking at commercial real estate, high-quality institutional commercial real estate being done L plus 1.75 to L plus 3 in the range. Obviously, on Sponsor & Specialties, we've talked about, you're getting much higher yields on some of those leverage loans. So when we talk about originations in any one given quarter, it's usually based upon kind of what the mix is in that quarter.

We have not -- obviously, it's very competitive out there, but we've not seen dramatic rate compression. We saw some before the pandemic hit kind of kind of evened out. And while it is very competitive, we're still able to meet our return on capital hurdles on these loans, and it really is just a question of in which loan category and which business we're booking them. And obviously, the ones that have lower yields are the ones that have better risk ratings and so the capital allocation is lower.

Got it. Okay. And then the last one for me is just more out of curiosity. You said you were going to reduce corporate square footage by 40%, 45%. Is that predominantly the double headquarter or Sterling's legacy headquarters? Or could you just frame for us what the corporate square footage is and how much in the way of cost savings is from that?

Yes. I think it's around $5 million on an annualized basis. And it really is not related to either exiting markets or changing headquarters. We're actually -- we have more people in our Waterbury headquarters than we did before we moved our official headquarters. And we're kind of -- we kind of rejiggering where everybody is. We have multiple locations in New York that we'll consolidate, we've got in terms of the overlap between the 2 banks. And then it's really just reduction in square footage in a lot of our markets in terms of taking less space in an existing building. We're moving to a more efficient building because of the future of work, because we have a hybrid model going forward and because we're using kind of a campus model where people are going into different offices.

And we also -- a lot of our call center activities, Matt, we're in the process -- one of the things we're trying to do from an efficiency perspective, we have basically working through an HSA Bank call center a legacy Sterling call center and a legacy Webster call center. And even before the merger, all of those call centers have started to move significantly remote, which is an industry trend. So we're also able to reduce sort of big footprint office space housing call centers over time.

(Operator Instructions) Our next question is from Laurie Hunsicker with Compass Point.

I wanted to go back to Jared's question on AOCI. Can you tell me what is the actual dollar AOCI loss in your $8.177 billion of equity?

So it was after-tax loss of $245 million, unrealized loss, Unrealized loss.

Got it.

And the way I would look at it, Laurie, is I would just reiterate, I mean, this is a lot of talk about this, and I'm not sure that we're as concerned as maybe some of you are, we're coming from a tangible common equity spot of 8.26%. For every 100 basis point immediate shock to the curve, 100 basis points, you can expect it would probably impact the tangible common equity ratio by 40 basis points. So if you put that in perspective, we've got a 300 basis point rate shock, 300 basis point shock, you would still be above 7% on your tangible common equity ratio. So I think I understand the concerns and I understand we're -- the talk about it, but we're not as concerned about it, to be honest with you.

And from an economic perspective, obviously, that rate increase would -- on the revenue side would help us significantly.

Exactly.

I hear you. I hear you. Your deposits obviously just became more valuable. It's only marking one tiny piece, but obviously, we follow it because we look at tangible book. Just wanted to get clarity on that. On net interest margin, net interest income and appreciate all the slides and the clarity you've given, I just want to make sure that I've got this right. So your guide on accretion income for the full year is $73.5 million, of which $36 million was in the first quarter, dropping to $18.3 million in the second quarter. Did I hear that right?

You did. And I don't -- this is -- these are -- this is spread out -- scheduled based on Contractual, our view of the loan, if there's great payments and stuff like that. So there will be lumpiness in this, you can expect that. That's for sure.

Yes, absolutely. I appreciate the guide. Okay. So just putting that together. So again, it was 29 basis points on your headline margin this quarter. Next quarter, it drops to 11 basis points on your headline margin. And...

Exactly.

Is that right? Okay.

No, that's reconciled.

Extrapolating then your $9 million to $10 million -- you're [falling] to $9 million to $10 million or so per quarter by the third and fourth quarter. So then that's going to be a 6 basis point or so, 5...

Yes. I think by the fourth quarter -- so let me just -- I think by the fourth quarter, my calculation is it's probably about 12 basis points in accretion, somewhere between 10 and 12.

Somewhere between. Okay. That's super helpful. Okay. And then PPP fees, what was that this quarter in terms of dollar amount of net interest income?

So it was $5.1 million.

Okay. And do you know how much you've got remaining of...

$84 million left in balances, which will run off probably just even in the second quarter. So we should be through it all by then.

Okay. So you probably have just about $1 million or $2 million left to PPP fees on that?

Yes. It's very small, very small.

Right. Great. Okay. And then on fee income, can you talk to us a little bit about -- well, just 2 questions. First, just specifically on BOLI, I was looking at that. I know Sterling has got a higher BOLI than you. Was there some sort of drop pro forma? Or is there some sort of mark or something like that...

No, no. There's no mark there. I don't -- if you're looking -- you should not see a change. I mean we -- there's no adjustment there.

Okay. Okay. Okay. Great. And then on fee income, can you just comment a little bit about NSF OD fees, how much that was in the quarter? How you're approaching a more customer-friendly change to that? When we could see timing and when we could see that maybe impact the noninterest income line?

Sure, Laurie. I mean, like the rest of the industry, obviously, we're working -- as we combine the 2 banks and integration on harmonizing product sets, so we're actually working on creating a product that's obviously consumer-friendly, meets consumer needs and is consistent with everyone else in the industry. I would say it will not have an impact in 2022. The other important thing to recognize is that our total aggregate OD fees are less than 1% of revenue. So less than $20 million across the 2 organizations. And so I think you'll see that go down over time as we roll out new products, but it won't have a material impact on our financial performance and it won't have really any impact on our financial performance in 2022.

And Laurie, let me just double back on something because I may have misunderstood your question on BOLI. Were you looking at the income statement from our press release because that would only have 2 months of Sterling in it, and that could...

Right.

So that's probably -- okay. I thought you were looking at the balance sheet.

No, I was looking at the income -- you know what, maybe I grabbed the Sterling number wrong. I'll go back and look at that (inaudible). And then on the OD NSF fees, I just want to make sure I heard that right. So that's running on a combined basis for both of you at about $20 million annually. Is that right?

In aggregate.

In aggregate, Okay. Perfect. Great. And then just one last question for me. This is small. Obviously, your credit is looking so great. Your growth -- commercial charge-offs growth, not net, of $11.2 million was such a jump from last quarter and from what it's been running. Last quarter was $800,000. Was most of that Sterling? Or was some of that vintage Webster. Anything -- one specific? Any color around that?

Yes. Laurie, we're not -- we don't talk specifically about that. It was one credit. I will say it was legacy Webster, and it was one commercial credit that made up the vast majority of that charge, with no -- there was no other interesting aspects or correlation in it.

Okay. Great. And then just -- sorry, one last question here. With respect to Sterling's multifamily book, can you just give us a little bit of color around that, just a little refresh? I think it's around $4 billion. Is there anything you've got on LTVs? If you could remind us what's rent controlled, what your plans are? Just any color around that would be helpful.

Yes, it's about -- thank you, Laurie. It's about $3.9 billion. It has a weighted average LTV at origination of 54% and a debt service coverage ratio on average of about 1.56%, performing very well and generating economic profit. So I don't think there are any strategic changes. Obviously, we're -- we actually have a nice business there, and we'll continue to originate, we're opportunistic.

Do you have how much is rent control there?

I don't. I'll ask Emlen to get back to you (inaudible).

And our final question is from Jon Arfstrom with RBC Capital Markets.

I only have a couple of questions. The growth rate you're talking about, John, the 8% to 10%, how much of that do you think is environmental versus the long-term potential of the company over the next couple of years? I guess my question is, can we see this kind of growth rate for a couple of years from the company?

That's a great question. And I'm not -- it may be simplistic because for those of you who've followed us, I kind of fundamentally believe that we've got enough levers, enough geographic opportunities, a bunch of interesting business niches and verticals that historically we've been able to grow commercial loans, which now make up the predominant portion of the balance sheet at roughly 10% CAGR, and it's been about 6 or 7 years. Obviously, in any one given quarter, you saw a mortgage warehouse have an impact on the annualized growth rate in the first quarter, that could change.

But particularly this quarter on a bigger base this year, we felt like all of those things remain true, all of the levers we can pull without having to push on risk. And we have the benefit, as I mentioned in my script and earlier, the bigger balance sheet to, at least in the short term, kind of accelerate some growth through single point exposures. Going forward, obviously, as the balance sheet gets bigger, market conditions dictate, it may get more challenging. But I still think, and if my Head of Commercial Banking was here, Chris Motl, right now, he'd probably smile is that we try and say to ourselves, how are we going to get to close to double digits, high single-digit loan growth on an annualized basis.

So my guess is with what we have, with the teams we think we can attract, with the various businesses we have, that in my mind, at least, as the leader of the company, we're kind of targeting 10% commercial loan growth. Now sometimes on mortgage and some of the other consumer categories, which are less, that's not a realistic expectation because the market just won't allow, which could drag down overall loan growth. But I still think 8% to 10% should be our bogey in a normalized economic environment as we move forward.

Okay. Good. And then last one, it's a real question, kind of a soft question, but maybe a good way to end the call. But you talked about the culture shaping off-site. And I'm just curious what you've learned from that. What do you guys need to work on, and that's serious, what do you need to work on? And then what's gone well so far from those activities?

Yes, it's a great question. I think it's the hardest thing. And it's -- I couldn't be more pleased and say that, I would be more guarded if I wasn't. I mentioned on a couple of nondeal roadshows, you're in a situation where it sucked, I know that technical term, it sucked you to have to wait for 4 months from our originally anticipated close date. But I think if you ask any of the executives or level 2 or level 3 folks across the organization what the silver lining was, it was the fact that we had 4 more months to work together in terms of planning and meeting and figuring out each other and building trust.

And so I think that actually helped. We hit the ground running. I've been really pleased. There's no question about the fact that it will take time to make sure that you get rid of the us versus them or people are still referring to things like legacy Webster and legacy Sterling. But I have to tell you that we've really coalesced around what it means to be a Webster banker about the behaviors we expect -- when we went in, and I don't want to get too granular when we went into the sort of culture practice as a leadership team, we realized that while we believe that all of these values were what we wanted to do, we had different definitions of what those behaviors were, different expectations.

And so we spent a lot of time saying we really need to be careful about making sure we're all on the same page. We all understand what we're trying to accomplish, we all understand the bank's mission and purpose, and we've come together really, really solidly. Half my direct reports are from each of the legacy banks, and I think we're operating as well as either bank was operating before from a trust and collaborative perspective. So we'll keep working it, reinforcing it, but I couldn't be more pleased with where we are 90 days into this project.

This does conclude our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Yes. I just want to thank everybody for their participation and continued interest and support of the company. Hope everybody has a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.