Good morning. Welcome to the Webster Financial Corporation Q3 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'd like 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 website at investors.websterbank.com. I'll now turn the call over to Webster Financial CEO, John Ciulla.
Thanks, Emlen. Good morning, everyone, and thank you for joining us for our Q3 earnings call. I'm going to provide remarks on our financial performance, strategic execution, and merger integration before turning it over to Glenn to review our financials in more detail. The Q3 results announced today reflect the strong progress we have made in creating a high-performing and differentiated company through solid execution on integration activities and a laser focus on delivering for our clients. We are one unified Webster growing across a diverse set of business lines, realizing revenue and cost synergies, supporting the communities in an expanded footprint, and delivering financial results that meet or exceed the target metrics we set forth when we announced the MOE 18 months ago. Our financial performance this quarter was stronger than last.
On an adjusted basis, we generated diluted EPS of $1.46 versus $1.29 last quarter. Net income available to common shareholders, $257 million versus $229 million last quarter, and PPNR was up to $371 million from $316 million. The potential of the company we have created is evident in our results. On an adjusted basis, we produced a return on assets in excess of 1.5% and a return on tangible common equity of nearly 21%. Our efficiency ratio was 41% in the quarter and over 400 basis point improvement. These results exceed the full- year 2022 pro formas we provided when we first announced our merger in April 2021. We are surpassing loan growth expectations without expanding our risk tolerances.
We're proactive in optimizing the balance sheet. We've continued to generate solid fee income, and we've done an excellent job of maintaining client service levels, adding and retaining clients and talent all while executing on the integration plan. Given the positioning of our balance sheet, the NIM expanded 23 basis points to 3.5%. Loans grew meaningfully this quarter, driven by a set of industries, asset classes and geographies. Several of our major loan categories grew significantly, including C&I, CRE and residential mortgage. Deposits also grew just under 2%. While executing on cost synergies and approaching an efficiency ratio of 40%, we continue to make investments across the company. We have said from the outset that Webster post-MOE is a growth story. We have been adding to commercial verticals.
Since the merger closed, we had the opportunity to add middle market bankers in our core footprint and have added to our national ABL team. We will continue to look for and make investments in colleagues and businesses that can grow our differentiated commercial business lines and that will generate deposits, fees and loans as we look to maximize economic profit over time. We will also continue to invest in technology that enhances the colleague and client experience. As we operate in an uncertain macro environment, we continue to execute on asset growth while staying disciplined and prudent in risk selection, underwriting, and portfolio management activities. Our credit metrics remain remarkably strong with lower NPLs and NPAs, lower commercial classified loans, and lower delinquencies all compared to prior quarter on both a percentage of portfolio and absolute basis.
While you will see that net charge-offs were elevated from prior quarter at a reported 25 basis points annualized, approximately $13 million of the net charge-offs resulted from proactive balance sheet management and optimization through the sale of more than $500 million worth of loans that were either no longer strategic or had sub-optimal risk return metrics. Absent those portfolio actions, the net charge-off rate would be an annualized 13 basis points more in line with Q2 and still below our 5-year pandemic annualized range of 16-19 basis points. A quick recap on integration, as I've touched on a number of the items in the integration slide already. We continue to integrate subledgers and systems underlying our core infrastructure.
This quarter, we combined our commercial credit risk management system and rolled out consolidated commercial pricing tools, and we continued our corporate real estate consolidation, where we are now 50% complete. Major milestones we anticipate in the Q4 include the consolidation of cloud data centers, the transition of our consumer wealth and investment services operations to a third-party provider, and by year-end, all of our colleagues will have completed cultural activation sessions, establishing a common foundation for our organization and aligning colleagues on strategy, expected behaviors, and most importantly, the strong values that are at the foundation of Webster Bank. With that, I'm going to turn it over to Glenn to review our financial performance for the quarter.
Thanks, John, and good morning, everyone. I will start with the reconciliation of core earnings on slide four. We reported GAAP net income to common shareholders of $230 million with EPS of $1.31. On an adjusted basis, we reported net income to common shareholders of $257 million and EPS of $1.46, each of which exclude one-time after-tax expenses of $27 million. Merger expenses were related to real estate consolidation, severance, and professional services. The strategic initiative expense is primarily a contribution to the Webster Foundation. Next, I'll review balance sheet trends before moving on to the income statement. On slide five, at period end, total assets were $69.1 billion, with total loans of $47.8 billion and total deposits of $54 billion. Loan growth was predominantly driven by the commercial and residential portfolios.
Deposits were up over $900 million on a quarter-over-quarter basis, with both public funds and HSA contributing. I will provide some additional color on the breakout later in the presentation. Loan growth was also funded in part with cash flow from the securities portfolio and shorter duration FHLB advances. Slide 6 highlights the diversity of our loan growth by category, a great illustration of the breadth of our promising business lines. In total, we grew loans $2.2 billion or 4.8% on a linked-quarter basis. Growth was evenly balanced between categories, with C&I, sponsor, and commercial real estate all growing around $600 million and residential mortgage growing $400 million. The yield on the portfolio increased 60 basis points.
Excluding accretion, the yield increased 72 basis points, a reflection of 61% of the portfolio being floating or periodic. Switching to deposits on slide 7, total deposit balances increased by $932 million or 1.8%. Increases in public funds and HSA drove the growth, with the former up over $800 million and HSA up $111 million. Corporate deposits grew roughly $500 million as we utilized a greater number of sweep and other alternative sources of funds. The total deposit cost increased 28 basis points from 9 basis points prior quarter. Our effective beta was 13% in the quarter and 11% since the closing of the merger. HSA cost of deposits were unchanged, illustrating the value of the business in a rising rate environment.
A final note on HSA, excluding third-party administered accounts, deposits grew $700 million or 9.8% year-over-year. Additional detail on HSA Bank is on slide 20 in the appendix. Beginning on slide 8, I will review the details of our income statement. We provide a reported to adjusted income statement by line item and compare our adjusted earnings to Q2. Significant growth in net interest income this quarter drove meaningful improvement in PPNR, net income, and EPS. On an adjusted basis, PPNR was up $56 million or 17.6%. Net income was up $28 million or 12.4%, and EPS was up $0.17 or 13%. I will cover the individual line items in more detail on subsequent slides.
The net interest margin was 3.54%, up 26 basis points on a recorded basis, and our efficiency ratio was 41%, down 408 basis points. On slide 9, net interest income grew $64.3 million relative to prior quarter. Adjusting for accretion in both periods, net interest income was up $76.8 million. This was an exceptionally strong result driven by growth and the asset sensitivity of our balance sheet. Excluding accretion, the net interest margin increased 35 basis points to 3.44%, and the earning asset yield was up 57 basis points in the quarter, also excluding accretion. In addition to the trajectory of benchmark rates, the increase in loan yields accelerated as a portion of our loan book that reprices is no longer impacted by floors.
As illustrated on the earlier slide, the cost of deposits increased 19 basis points quarter-over-quarter. While we anticipate deposit pricing increases in the coming quarters, our NIM should continue to grow given the attractive profile of our earning assets, which reprice and originate at higher absolute rates. On slide 10, we highlight our fee income for the quarter. On an adjusted basis, fees were down $7 million linked-quarter and $3 million year-over-year. The linked-quarter decrease in fee income was driven primarily by lower levels of customer interest rate hedging activity and other transactional loan fees in commercial banking. The year-over-year decline was the result of lower direct investment and mortgage banking income. Slide 11 summarizes non-interest expense. We reported adjusted expense of $293 million relative to prior-quarter of $292 million.
We continue to make progress on cost efficiencies related to the merger. However, this quarter included increased levels of performance-based compensation. The year-over-year decline of $2 million is a combination of our cost save efforts to date, offset by the increase in intangible amortization, the Bend Financial acquisition, and performance-based compensation. Slide 12 highlights our allowance for credit losses, which was up $3 million over prior quarter. After recording $28 million in net charge-offs, we recorded $31 million in provision expense, with loan growth representing $20 million of the increase and macro factors adding $11 million. On slide 13, we highlight our key asset quality metrics. On the upper left, non-performing assets declined $38 million or 15% quarter-over-quarter. Likewise, commercial classified loans declined $98 million or 14%. Net charge-offs in the upper right totaled $28 million or 25 basis points of average loans on an annualized basis.
As John mentioned, $13 million of the charge-offs were related to portfolio optimization activities. Without that, net charge-off rate would have been closer to 13 basis points. The allowance coverage declined modestly from 1.25% to 1.2% at period end. The allowance to non-performing loan ratio increased to 2.7 times, up from 2.3 times last quarter. Coverage as a percent of commercial classified loans increased to 95% from 81% last quarter. Slide 14 highlights our strong capital levels. All capital ratios remain well in excess of regulatory and internal targets. Our common equity tier one ratio remains strong at 10.82% and is still above the medium-term operating target of 10.5%. The tangible common equity ratio was 7.27%.
The net of all capital effects this quarter resulted in a slight decline in our tangible book value per share, which decreased to $27.69. This was primarily driven by AOCI valuation, share repurchases, and partially offset by strong earnings. I'll wrap up my comments with our outlook on slide 15. We have narrowed our view down to the remaining quarter. We expect GAAP net interest income on a non-FTE basis of $570 million-$590 million, excluding accretion, driven by our projection of a year-end Fed funds rate of 4.25% as well as continued loan growth. This excludes $15 million of scheduled purchase accounting accretion. The details of which can be found on slide 18 in the appendix. For those modeling net interest income on an FTE basis, I would add roughly $14 million to that measure.
Relative to last quarter, our outlook implies full-year net interest income excluding accretion of $2 billion, an increase of roughly $100 million or 5% from the outlook we provided last quarter. We expect loan growth for the quarter will be in the range of 2%-3%. Given progress so far this year, that would imply a growth of around 14% since merger close relative to our original target of 8%-10%. Fee income should be in the range of $105 million-$110 million, which incorporates the impact of lower fees on the outsourced consumer investment business. Core expenses are expected to be in a range of $290 million-$295 million, which includes increased performance-based compensation relative to our prior estimates. On capital, our overall philosophy is unchanged.
As we approach our medium-term operating target, our organic growth opportunities will likely occupy a greater share of capital deployment, and we will remain disciplined in evaluating opportunities to effectively deploy capital. Lastly, we are forecasting an effective tax rate of 22%-23%. With that, I'll turn things back over to John for closing remarks.
Thanks, Glenn. We recognize we're operating in a time of uncertainty in the macroeconomic and geopolitical landscape and that there are wider ranges of potential outcomes that it could impact the operating environment. We believe that our diversified and high-quality businesses and loan and securities portfolios, our healthy capital and loan reserve positions, our credit and operating risk infrastructures, and the quality of our colleagues all have us prepared to effectively navigate the macro environment ahead. As I mentioned above, we are being thoughtful in our loan risk selection and emphasizing strong underwriting and portfolio management processes. I want to wrap up by emphasizing the outstanding progress we've made year to date and the momentum we expect to carry forward.
Our commercial loans are on pace for 14% growth this year as we pursue growth in businesses where we have a strategic advantage and the ability to be selective with respect to risk profile and return metrics. Our deposit franchise positions us particularly well relative to peers, where our total cost of deposits increased just 19 basis points relative to a 57 basis point increase in our earning asset yields, excluding the impact of accretable yield. We remain confident in our ability to fund future loan growth given our multiple deposit channels and our liquidity profile. We expect we will continue to meaningfully benefit from interest rate increases, and we have levers to pull in terms of capital allocation, efficiencies, and investment to maintain the current momentum.
We'll be sending out a save the date, but we wanted to provide a heads up that our intention is to hold an investor day in New York City on March second, where you'll have the opportunity to hear from our talented management team on our company and the go-forward strategies and financial performance expectations for 2023 and beyond. Finally, thank you to my colleagues for their continued diligence and hard work as they execute on our core business initiatives while addressing the added challenge of integrating the new Webster. I want to apologize. I understand we had some technical difficulties at the beginning of the call, and I thank you for bearing with us. Operator, Glenn and I will open it up to questions.
At this time, I would like to remind everyone if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Chris McGratty with Keefe, Bruyette & Woods.
Hey, good morning. Thanks for the question. Maybe Glenn, the upgraded NII guide to $100 million, very good. I guess very good update. One of the trends we've seen this quarter is the narrative around peak NII. Wouldn't seem like that's the case given this. Can you speak to growth from that Q4 level as you go into 2023? Be interested in your thoughts there. Thanks.
Sure. Great. Let me just start. I'll talk a little about NIM. Just for context, I think our ex-accretion exit NIM in September was 3.55%. I would think if you look at our Q4 range, I'd probably put that in a range. Again, ex-accretion of 3.6%. We continue to see NIM expansion. As we look out into 2023, I think there's a couple factors. One is that our modeling, we're expecting peak Fed funds in the Q2 of around 4.50, right? Given that dynamic and our deposits, which we're forecasting again in like the low 30s over the next four quarters, we continue to see NIM expansion.
Now, we see NIM expansion going into the Q1, and then we see more modest NIM expansion in the back half of the year. I think we still feel really positive about the prospects in 2023. The dynamic here is that even though we have higher deposit pricing, which we are expecting, our asset book is repricing more significantly.
Okay. That's great. Great. Is the 30%, the low 30s, that's interest-bearing or is that total?
I'm sorry, is that?
Is that for all deposits or just interest-bearing deposits?
Yeah, that's total. I'm looking at the total deposit costs.
Okay.
I would say, you know, lower thirties over, you know.
Got it.
over the course of four quarters.
Great. If I could, the actions you took in the quarter to clean up credit, could you just provide a little more color on that? I think there was a loan sale. Maybe I guess what prompted this, could you consider more? I guess how should we be thinking about the confidence in credit going into the year?
Yeah. Chris, happy to talk about it, and I think it's important to talk about it. I think it was less to clean up credit and more literally to kinda optimize our balance sheet going forward. We've talked publicly in the beginning that after diligence in closing the deal, we liked all the businesses, but that over the next, you know, 4-6 quarters from close, as good stewards of capital, we would continue to look at all of our businesses to see whether they remained strategic, whether the risk-return dynamics were strong, whether or not there were any potential kinda credit weaknesses as you looked out over paradigm shifts. We took the opportunity. I mean, think about it. We grew loans around 5%, including the disposition of over $500 million in assets.
With the tailwinds from our asset sensitivity and the strong organic loan growth in key segments, we thought it was a great time to take those actions. If you think about it again, look at the total charges related to those actions over $500 million. You know, the average sale price was like $0.98 on the dollar. So they certainly weren't sales of distressed assets. There were note sales in there were portfolio sales, some to, you know, regulated banks. So this was not kind of a cleanup of credit right in front of us. But obviously in a higher expectation of spread environment, there's an interest rate impact on the discount on the prices.
There were some note sales of non-strategic office, for example, that we thought would be a good time to dispose of. We just thought it was a really smart move. Obviously, we think it'll benefit us going forward, as much from a return on equity perspective as from an avoid credit issue perspective.
That's great color. I agree. Good move. Should we expect more to the end of the year, or is this kind of it?
I don't see anything right now, so you know, we don't have that in our guidance. You know, I don't think it's gonna be a reflection of what we do every quarter going forward. We really like the businesses we're in. Obviously, as we said, we'll continue to look at the dynamics of the combined portfolios. So if there are opportunities that make sense from an economic perspective or give us more flexibility going forward or protect us from potential paradigm shifts in credit, we'll do it. Nothing that's in our sights.
Great. Thanks, John.
Thank you.
Your next question comes from the line of Mark Fitzgibbon with Piper Sandler.
Hey, guys. Good morning.
Hey, Mark. Good morning.
Glenn, I wondered if you could share with us what your spot rate on deposits are today?
Sure. I know that we ended the quarter. Let's see. I had that here somewhere. I would put it in the range of. Let me. Yes. It might be. Say in the range of 60 basis points. 60-65 basis points.
Okay, great. Then secondly, just to kind of follow up on one of the earlier questions about credit. I guess I'm curious when you do your modeling, how you're thinking about the provision line.
Yeah. I mean, Mark, as you know, we think a lot about the provision line, and we have a relatively conservative bias. That doesn't always factor in, particularly with CECL and the way it works now. I would say at the high level, and then Glenn can certainly feel free to fill in, the dynamics this quarter were significant loan growth, right, which requires a higher reserve. The Moody's scenario, which we and many of our peers use, was kind of worse, right, which requires, you know, in general, directionally more reserves. You saw our credit stats which as I said, I use the word remarkably not to brag, to just to be like surprising in this environment, right, that our NPAs and our classifieds, you know, were down materially. That's kind of a good guy, if you will.
I will tell you that, you know, as I'm looking at the portfolio, one encouraging kind of data point for me is that in each of the last three consecutive quarters, the average weighted risk rating of our originations is actually better than on a, you know, material basis than the actual weighted average risk rating of the existing commercial portfolio translated into the fact that we are bringing on lower risk assets than we have each sequential quarter, which ends up bringing down the overall weighted average risk rating, which again would be a good guy. You saw those dynamics. You know, bigger loan portfolio, more reserves. Worse forward-looking economic scenario for Moody's, more reserves. Better asset quality metrics, lower reserves. Higher quality originations, lower reserves. That's kind of where we end up.
We feel really good. If you look at our peers, Mark, we're still top quartile at least in terms of our reserve coverage ratios. You know, I'm pretty pleased with where we are. We also have a lot of capital. That's kind of the way I'm thinking about it.
Yeah. The only thing I would add to that, Mark, is that John talked about, you know, the loan growth, $2.2 billion, $20 million provision against that. If you look at the macro factors, and we have $11 million on the slide here, there's really two things. One, if you just strip out the Moody's impact and the fact that they slashed GDP estimates, I mean, that's probably $20 million. Sort of clawing that back is $9 million. The net $11 million are those two things. That $9 million is really related to, as John highlighted, the improvement that we see in, you know, NPLs on our books, commercial classifieds, et cetera, and a weighted risk, you know, metric that's improving.
Great. Lastly, I wondered if you could give a sense for what your loan pipelines look like today, and maybe also share with us what the commercial line utilization rates are.
Yeah. I'd say we're still tracking all the different. Like, I would characterize the line utilization as flat to slightly up, not materially across, you know, all of our commercial businesses, Mark. I'm not sure what that evidence is. I mean, I think still solid demand, but, you know, it's not expanding at a crazy margin. In ABL, for example, which is usually a harbinger of, you know, faster working capital cycles, I would say flat to marginally up. Pipeline is tough. The pipeline is relatively strong in certain sectors. I kind of feel like we'll see a flattening of loan growth over the next couple quarters in kind of core middle market areas.
We have seen some slowdown in, you know, the trading of real estate assets or in the sponsor book in terms of people selling companies and buying companies. That has an impact. If I look just at my pipeline report, which obviously I did last night, you know, it's robust and it's similar as you'd see slightly above Q3 going into Q4, where there's usually a heightened amount of activity.
Thank you.
Mark. Hey, Mark, before you go, let me just clarify something. I may have misunderstood the question. On our deposit cost for the Q2, I think we exited like at 41 basis points. But on the Q4, we're expecting that to be in the range of 55-60. Just for clarification.
Thank you.
Sure.
Thanks a lot, Mark.
Your next question comes from the line of Casey Haire with Jefferies.
Yeah. Hey, thanks. Good morning, guys.
Hey, Casey.
How you guys doing? Glenn, just to clarify, I think you meant you said Q3, what it exited the quarter, the 9/30 spot rate for deposit costs ended 55, 60, or you expect Q4 to end that way?
No, I said the Q3 right now we're at 41 basis points. As you go into the Q4, you know, with our beta assumptions, we're probably in the range of 55-60 basis points.
Gotcha. Okay. Thanks for clarifying. All right. On, I was wondering about the funding strategy in the Q4 underlying your NII guide here. In the Q3, you guys kind of had a nice balance between, you know, a rebound in the muni deposits, rundown of securities, and a little bit of borrowings. What is-
Yep
What is the outlook for the Q4 and beyond here?
Yeah. Great question. If you look at our loan growth and you say sort of take it right in the middle between 2% and 3%, you're probably at $1.2 billion or something like that. Let's just use that as a proxy. I think that the thing that's really encouraging about the franchise is that, and we've pointed this out a few times, is that we have so many multiple levers of funding and liquidity sources, that that's really encouraging. As I look at funding going into the Q4 and even beyond, some of the key drivers will be things like, you know, the continued runoff of our securities portfolio as we invest that in loans. I think we have, you know, deposit growth in some of our commercial segments.
Obviously, HSA as we get toward the first part of next year. We have our digital deposit gathering sources, you know, whether it's BrioDirect, whether it's banking-a s- service, things like that. Lastly, you know, from a liquidity standpoint, we have plenty of sources of funds as far as, you know, funds that we can draw down on. That would be sort of the last thing we do. We continue to feel good about our funding ability.
Gotcha. Okay. The guide is predicated on another 100 basis points of Fed hikes here. What kind of upside is there? I mean, the forward curve is at 4.75 by year-end. What kind of upside would there be if it plays out as the curve expects?
Yeah. I mean, you know, look, we're using our estimate right now of 4.50. Obviously, there's more upside. You know, you could figure it out mathematically. You know, I guess the thing I would point out is, you know, the significance of our assets repricing, and the slowness of betas coming around. So I don't have that. Our model has it peaking at 4.50. If there's upside to that, you know, that would be additive, generally.
Okay. Very good. Just last one on the credit front. The $500 million disposition, was the sponsor and specialty finance book touched? Just any color on the. If my math is right, there was about $16 million of commercial losses outside of the disposition. Just any color on what was driving that.
Yeah. Nothing in sponsor and specialty was disposed of. With respect to the core 13 basis points that I reflected driven by two commercial credits, Casey, one of which had been classified since pre-pandemic and finally capitulated. Neither of them were in the same geography asset class or kind of had anything that I would say is systemic in there. You know, I feel pretty good about 13 basis points of charge-offs at this point in the cycle. Nothing to say except two unique credits that ended up having a loss given default at the end of the day, unfortunately.
Understood. Thank you, guys.
Thank you, Casey.
Your next question comes from the line of Steven Alexopoulos with JP Morgan.
Hey, good morning, everyone.
Hey, Steve.
I want to start on the deposit side. If we look at non-interest-bearing deposit balances, you actually had pretty decent growth in the quarter while banks everywhere are seeing outflows. You know, how did you buck the trend in the quarter, and do you now expect to see outflows of those moving forward?
Yes, Steve. Obviously, it's relatively good news, but we're also pretty realistic about it. There was some seasonal inflows from government deposits, right? Our focus going forward is on making sure that as we kind of go through the next few quarters, that our focus is on continuing where we're growing loans to grow full relationships, to grow commercial deposits. Obviously, we're going to get the benefit of HSA as we get to year-end and Q1. I think we did it largely because we've got, you know, really sticky deposits in our retail franchise. I think we've got really good commercial solid deposits with our relationships.
I would have to say that, you know, a lot of the reason we were able to claim a 2% deposit growth when there were outflows was a seasonal flow in from government deposits. As Glenn said, you know, I think what's great right now about the way that our balance sheet is made up is we do benefit from the asset sensitivity significantly. Obviously, we're taking prudent measures to make sure whenever the time comes when Fed funds rate comes down, that we're protecting our cash flows. It does give us some pricing flexibility in key relationship areas on deposits. And obviously we're focused now on continuing to generate core deposits.
We've got HSA, we've got the direct bank in BrioDirect, which is a higher cost deposit, but nonetheless a deposit that we found to be stickier than we originally thought it would be. Then we've got obviously all the diversified business banking, commercial segments, small business and retail. It's going to be work, and we're continuing to focus on it, right? Because if you're growing loans at the clip we are, we need to make sure that we're continuing to generate good sticky deposits going forward. We'll take the victory of growing deposits in the quarter, but we also did benefit from government seasonality.
Okay. John, can you size that for us? What was that benefit from the seasonal inflow from government deposits?
Well, I think it was about $800 million, Steve.
That was 8.
You know, quarter-over-quarter, right?
Got it. Okay.
There was sort of a decline in the commercial. I think we have a, you know-
There's a chart, a slide.
Offset by some wholesale funding.
Okay. I wanted to also ask, so the loan to deposit ratio has moved up quite a bit over the last few quarters. Where do you see that stabilizing?
We feel good about operating in the, you know, the high 80s-90% range, given the environment today. You know, that's where I would expect it to be. In fact, as I look out over the next couple of quarters, that's exactly where it is.
Got you. Okay. Thanks. Regarding the acquisition of People's United, this deal has attracted quite a bit of attention in Connecticut, particularly around the system conversion that didn't seem to go as planned. How much of an opportunity is that for you, right? You're the bank I think of most that could benefit from what's going on there. Have you seen any increase in client acquisition related to all the negative news on that? Thanks.
Steve, you can't ask that. You can't get me on that question. I have such respect for that bank. Look, we've talked about this in the past that it's interesting in a lot of our key businesses, we really don't overlap with People's United, and we didn't overlap with People's United, and we don't overlap with the combined M&T People's United. There obviously had been some disruption. People's United Bank clients are loyal because People's United is a really good bank. There are opportunities obviously with colleague disruption there as well because that's, you know, not an MOE, it's an acquisition. There are opportunities from a personnel perspective and from a client perspective over time. As I said, it's a good bank and I wouldn't want to comment on specific opportunities.
Okay. Fair enough. Thanks for taking my questions.
Thanks, Steven.
The next question comes from the line of Matthew Breese with Stephens Inc.
Good morning.
Hey, Matt.
Hey, John. You alluded to this earlier, you know, just talking about maybe a softening of loan growth next year, but I was hoping you could better kind of frame that for us. I think historically you've always positioned the bank to be kind of a high single digit grower. Obviously, a couple the last few quarters have been better than that. How would you kind of frame for us what next year expectations are? And then, secondarily, just a sense for current rate on the pipeline. Yeah, I'll leave it there.
Yeah, no, great question. You know, we're sort of not changing guidance. I think, you know, we're 8%-10% year in and year out. This year I think we've been selective. We've got a couple of categories that have really, you know, driven growth and I think we're fortunate that they tend to be categories with lower loss given default which I'm happy about in this cycle. As I mentioned earlier to one of the questions, our pipeline remains robust.
I think we're gonna have the ability and the luxury, and I think, you know, many of our competitors will as well, to be a little bit more selective on rate and structure just given the fact that some of the non-bank lenders and their cost of funds and other dynamics are changing the nature of the marketplace. I still feel like when we made the announcement in April of 2021, one of the premises of the deal was that we, on a combined basis, could grow our commercial loans 8%-10% year in and year out. We're obviously benefited by a bigger balance sheet and higher hold levels, which we've talked about.
Even if the loan market and loan demand slows a little bit, some of the niches and verticals and relationships that we have continue to enable us to grow loans. In our model, we're still looking at 8%-10% loan growth next year, regardless of kind of what the overall demand environment is. I believe we can do it safely. You know, if we don't want Jason on the call, obviously because you never want your Chief Credit Officer on the earnings call. That generally portends to bad things. If he were here, you know, I think we're able to kind of narrow our focus in resilient businesses, stay away from things we think are more cyclical, and continue to grow loans safely at 8%-10%.
The only thing I would add to that is, you know, when you look at the quarter, I think our originations were probably about, and this is the Q3, about 5.20, 5.2%, right? As we look out, it's probably gonna be, you know, closer to the range of like 5.50%-6.00% origination rate.
Understood. Okay. Then could you just talk about digital deposits, the balances, between BrioDirect and then the banking-as-a-service segment? How much of your funding projections should we be thinking rely on these buckets versus traditional, you know, street retail and commercial?
Yeah, Matt, sure. And I think I've been pretty consistent in saying, you know, we've tried to lean in those areas. Obviously, BrioDirect is up, running, and proven, and we're able to generate some deposits there. We did in the Q2. We did in the Q3. Glenn can give you the number. As it relates to banking-as-a-service, I don't know whether this is a pivot in narrative, you know. In the Q2, I talked about the fact that we, you know, have three or four relationships that are live with a pipeline of about $500 million-$750 million of deposits, but that we really didn't factor in significant profitability or contribution, nor did we factor in significant investment in the banking-as-a-service space.
I think the update there is things are a little slower than we thought. Luis and I continue to kind of narrow our focus in those areas where we think we can drive, you know, core deposits and drive kind of liquidity. We're not factoring in significant funding from the BaaS channel over the course of 2023, so we're not relying on that in our model. That would be upside gravy. With respect to BrioDirect, we do expect to have that as part of our arsenal. Maybe Glenn, you can touch on. Yeah, sure. I think, just to start, like digital direct is probably about $1.1 billion right now. With the biggest driver of that being BrioDirect. But as you know, BrioDirect is like a more of a higher beta type product.
It is a lever that we have that we can get, you know, good funding and if as long as we're turning it into loans in a range of 5.50%-6%, you know that, you know, that's a pretty good funding source. I think BrioDirect is one channel that we have that we can pull the lever, we can adjust that pretty quickly. As John mentioned, you know, the banking-as-a-service and stuff like that. More importantly, I think, you know, besides the securities portfolio running off, you know, we expect to have deposit growth in commercial segments. HSA, as you know, will come in the Q1.
That's the enrollment period, so we should see it pop on the HSA as well. There's again, I keep coming back to it because I think it's really unique for us, is that we have so many multiple sources of funding, that you know that'll continue to distinguish us. Certainly it's playing out in our financial forecast.
Okay. Thank you. Last one for me, John. The loan sale. You know, I think there's been some lingering questions on whether or not there were areas of the Sterling portfolio that would eventually, you know, be exited or continue to be part of the story. Did the loan sale have anything to do with kind of legacy Sterling ancillary segments? If so, you know, what were those?
Yeah. I'm not gonna talk specifically. I think the overall theme is both banks had kind of suboptimal risk return businesses, and as we work through them, you know, as a $70 billion bank now, we have the opportunity to decide whether or not we can either accelerate and correct and improve businesses or decide to exit. I guess I'm trying not to be too mad. I think the answer is kinda not specifically related to legacy Sterling, but related to the entire organization. There are suboptimal portfolios that kind of we've looked at and moved through.
We were able to kind of act on everything we identified in the quarter as things where we didn't think we were gonna be able to get return for the appropriate risk, or as I said on a couple of select note sales, you know, in key areas where there may be paradigm shifts like office, we were able to kind of lighten our exposure. I'm gonna leave it at that. I don't think it's a worry. I know you characterized it as kind of like a worry. There are, you know, subscale and suboptimal businesses that we will over time figure out whether or not we want to accelerate, or whether we wanna exit and whether that exit is a loan sale or just a wind down of the business. That'll happen over time.
Right now, we love the portfolio of assets. We like the credit quality a lot, in the entire bank when you bring all the portfolios together.
Understood. Okay. That's all I had. Thanks for taking my questions.
Thank you.
Your next question comes from the line of Jared Shaw with Wells Fargo Securities.
Hi. Good morning. This is Timur Braziler filling in for Jared.
Hey, Timur.
Hey, guys. Maybe just starting on the bond book and using that as a source of funds, you know, does that slow with the expectation that loan growth slows, and does that pretty much end in the Q1 as HSA seasonality kicks in? I guess, what's a good kind of base we should be thinking about for the bond book?
I think you would continue to see. First of all, it has extended with the rise in rates. Our cash flow has come down a little bit. You know, still for the quarter, you know, if you're using something in the range of, like, $250 million, I think that's pretty good, right? You know, that's how I would generally model it. You know, we continue to reinvest. What came off in the quarter, in the Q3 is $238 million. It came off at 2.83%, right? If we can reinvest that in loans, you can see the spread difference, right? You know, we'll continue to do that as a source of funding for loans, going forward.
Okay.
Did you have a second part to that question?
Well, just with HSA coming on in the Q1 and that being used as a funding vehicle.
Yeah.
Does that kind of slowdown in 2023, or is that the strategy that'll be used in 2023 as well?
Yeah. I mean, I think we've talked about this. I think if you look at the total book at $15 billion, we sort of think of it as, you know, part of it is that the deployment of the excess liquidity we had back a couple quarters ago. You know, that's done well for us from an earnings standpoint, but it's always been our intention to sort of move that into the loan book and pick up 150 or now, you know, 200 basis points in doing so. Even with HSA coming in in the Q1, you know, given our loan growth for the year, you know, I think that'll still be a good source of funding for us.
Okay. Maybe just bigger picture on the Sterling integration. I mean, the results post-deal closing have already been quite strong. Integration is still kind of slated for middle of next year. What changes once that integration is complete? Is that just you'll be able to take out some more expenses, or do you expect to see some operational gains kind of in how lending or deposit generation is being conducted?
Yeah, that's a really interesting question. I think it won't have a material impact on our ability to generate revenue, right? One of the things we talked about with this transaction is the complementary nature. Again, I always harp on this, and I'll take the opportunity to do it again, is that a lot of times when MOEs don't deliver either in time or they don't deliver ever, it's not because of the cost savings. This wasn't a cost savings deal. Only 10% of the combined cost savings, no banking center consolidation out of the gate, right? It was really about the fact that we were able to put two banks together where everyone could continue focusing on their customer because there was virtually no overlap from a retail business banking or commercial perspective.
I think that's proven out. So when we get the technology integration and conversion done next July, I don't think that you know signals our addition to accelerate revenue, except to your point of having maybe a more resilient and scalable operational platform. But for us, what it will do is we will finally get to retire one of two core systems. We'll kind of finally get to retire several commercial subledgers and make us more efficient over time. So we do feel like our operational effectiveness will be better. Our operational efficiency and our cost structure will certainly go down, and that's one of the things we're excited about. You've seen obviously inflationary pressures on the industry throughout.
You know, we still have another 12-18 months of the ability to offset some of the pressures of inflationary expenses on wages and other things by the fact that we still haven't consolidated three call centers. We still haven't, you know, fully gotten to our conversion on our core system. So all of that should give us kind of more flexibility from an expense perspective. I don't think it'll change the trajectory of revenue growth.
Okay, great. Just last for me, more of a modeling question. The scheduled accretion guide of $14.6 million in 4Q 2022, do you have any visibility as to what accelerated accretion in the quarter could be just kind of looking at the delta between, you know, Q3 accretion and the Q4 guide? I guess for the Q3 accretion, was any of that component driven by the loans, the $500 million of loan sales? Did that kind of drive any of the accelerated accretion component there?
No. I mean, this is generally it's prepayments. I mean, accretion's down obviously quarter-over-quarter, but, you know, there'll be volatility. Look, when we announced and put in the, you see the impact of purchase accounting back on page 18 of the slides. That was just based on scheduling. Obviously as customers prepay and stuff like that'll accelerate. Right? I think there's probably about 7, maybe, you know, a smaller amount. It's probably, you know, $600,000-$700,000 due to the loan sale in that accretion number. It's not meaningful.
Okay. I guess it's hard to look at the pay down schedule, but should we be assuming a similar level kind of accelerated accretion in the Q4, or is that?
Well, we gave it to you. We laid it out for you there. It's like, you know, on the loan side, it's $17 billion, right? You know, that's our best estimate right now, Timur. It could change based on, you know, prepayment activity and stuff like that.
Got it. Great. Thank you.
Thank you. Thanks.
Your next question comes from the line of Laurie Hunsicker with Compass Point.
Yeah. Hi. Thanks.
Hey, Laurie.
Good morning.
Good morning.
AOCI, what was that tangible common equity this quarter on a dollar basis?
Without AOCI?
No. Just what was the AOCI drag in-
Oh, the-
tangible common equity.
The AOCI in the Q3 impact it's $688 million, right?
Perfect.
That's after tax. You know, that's an increase of about $242 million quarter-over-quarter.
Perfect. Okay, great. John and Glenn, just going back to the $500 million sale, and I appreciate you don't want to break out what's legacy Webster versus legacy Sterling. How much of that was office? What were the other larger components in there? Just a refresh on office, right? We had last quarter, you gave us it was $2.2 billion, of which $520 million was in New York. Do you have or, you know, NYC, I guess, proper. Do you have a refresh on what that is as of 3Q? Thanks.
I'm happy to do that. The impact on our office exposure between the asset sales and other just general amortization and payoffs was about $75 million. We're $75 million lighter on total office exposure than what we had walked through, and I'll refresh those numbers for you in a second. The rest of it, the rest of this stuff related to kind of general C&I activity in terms of the $500 million, so general C&I businesses. I would say that if to refresh office, if you recall, there's not really a material change except for the $75 million dollar or so reduction.
We talked about $2.2 billion in total office exposure, about a little over $500 million of which was kind of stabilized medical office, which, you know, has a much better operating profile and I think is not subject to paradigm shifts that would impact, you know, traditional office. If you take that $1.7 billion remaining roughly, about half of it is class A, the other half is class BC, which is what we're focused on the most. Again, take the maybe 50/50 of the asset sales. You're down to about $800 million in terms of BC office exposure. The total New York City office exposure in the five boroughs is around $400 million. That remained largely unchanged, and that's about split 50/50 A and then B and C.
We haven't seen really a change in the underlying risk ratings or classified content there, although, you know, we're not taking our focus off of it. Obviously evidenced by the fact that some of our discrete note sales were in that category, Laurie. Also again, reminding you that we sold all of those loans at a combined rate of $0.98 on the dollar. You know, we weren't selling loans with identified loss content. We're just making decisions to kind of, you know, eliminate non-strategic assets that over time could have lower value.
Got it. Okay. Just so that I'm clear, I had in my notes, last quarter, $520 million was New York City. That's now down to $400 million?
You know what? Let me check. Maybe it's four. Oh, I think medical is also in that, Laurie. Non-medical office in New York, around $400 million.
At this time, there are no further questions.
Great. Thank you very much for joining us today, and have a wonderful day.
This concludes today's conference. You may now disconnect.