Webster Financial Corporation (NYSE:WBS)
Q3 2022 Earnings Conference Call
October 20, 2022 9:00 AM ET
Company Participants
Emlen Harmon – Investor Relations
John Ciulla – Chief Executive Officer
Glenn MacInnes – Executive Vice President, Chief Financial Officer
Conference Call Participants
Chris McGratty – Keefe, Bruyette, & Woods
Mark Fitzgibbon – Piper Sandler
Casey Haire – Jefferies
Steven Alexopoulos – JPMorgan
Matthew Breese – Stephens Inc.
Timur Braziler – Wells Fargo Securities
Laurie Hunsicker – Compass Point
Presentation
Operator
Good morning. Welcome to the Webster Financial Corporation Third Quarter 2022 Earnings Call. Please note, this event is being recorded.
I would now like to introduce Webster’s Director of Investor Relations, Emlen Harmon to introduce the call. Mr. Harmon, please go ahead.
Emlen Harmon
Good morning. Before we begin our remarks, let me 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’s CEO, John Ciulla.
John Ciulla
Thanks, Emlen. Good morning, everyone, and thank you for joining us for our third quarter earnings call. I’m going to provide remarks of financial performance, strategic execution and merger integration before turning over to Glenn to review our financials in more detail. The third quarter results announced today reflect the strong progress we’ve 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 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 [indiscernible] 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 [Technical Difficulty] quarter and PPNR was up $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 exceeded the full-year 2022 performance we provided when we first announced our merger in of April 2021.
We are surpassing loan growth expectations without expanding our risk tolerances. We’re proactive in optimizing the balance sheet, we continue to generate solid fee income, we’ve done an excellent job of maintaining client service levels, adding and retaining clients and talent, while executing on the integration plan.
Given the positioning of our balance sheet, the NIM expanded 23 basis points to 3.5%. Loan grew meaningfully this quarter, driven by [Technical Difficulty] 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 for the company. We’ve said from the outset that Webster post MLE [Technical Difficulty]. We have been adding to commercial verticals [Technical Difficulty] close, 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 the percentage of portfolio and absolute basis.
While you will see net charge-offs were elevated from prior quarter at a reported 25 basis points annualized, approximately $13 million of the net charge-offs 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 suboptimal risk-return metrics. Absent those portfolio actions, the net charge-off rate would be an annualized 13 basis points, more in line with Q2 and still below our five-year [Technical difficulty] annualized range of 16 basis points to 19 basis points.
A quick recap on integration. As I’ve touched on a number of the items on the integration slide already. We continue to integrate sub ledgers and systems [Technical Difficulty] 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 fourth quarter include the consolidation of cloud data centers, the transition of our consumer wealth and investment services operation with 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, [Technical Difficulty] 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.
Glenn MacInnes
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 onetime after-tax expenses of $27 million. Merger expenses were related to real estate consolidation, severance and professional. The strategic initiative expense is primarily the 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 break out later in the presentation. Loan growth was also funded in part by cash flow from the securities portfolio and shorter duration FHLB advances.
Slide six highlights the [diversity] (ph) of our loan growth by category, a great illustration of the breadth of our promising [Technical Difficulty]. In total, we grew loans $2.2 billion or 4.8% on a linked quarter basis. Growth was [Technical Difficulty] between categories with C&I, sponsor and commercial real estate, all growing $600 million and residential mortgage growing $400 million. [Technical Difficulty] 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 seven. 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 costs 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 eight, I will review the details of our income statement. We provide our reported to adjusted income statement by line item and compare our adjusted earnings to the second quarter. 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 in subsequent slides. The net interest margin was 3.54%, up 26 basis points on a reported basis and our efficiency ratio was 41%, down 408 basis points.
On slide nine, net interest income grew $64.3 million relative to the prior quarter. Adjusting for accretion in both periods 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 our benchmark rates, the increase in loan yields accelerated as a portion of our loan book that reprices is no longer impacted by [indiscernible].
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 the 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 the combination of our cost save efforts to date, offset by the increase in intangible amortization, the Bend 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, nonperforming assets declined $38 million or 15% quarter-over quarter. Likewise, commercial classified loans declined $98 million or 14%. Net charge-offs in the upper right totaled $28 million or 25 basis points of average loans on an annualized basis. As John mentioned, $13 million of the charge-offs were related to portfolio optimization activities. Without that, net charge-off rate would have been closer to 13 basis points. The allowance coverage declined modestly from 1.25% to 1.2% a period end. The allowance to nonperforming loan ratio increased 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 1 ratio remains strong at 10.82% and it’s 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, where we have narrowed our view down to the remaining quarter. We expect GAAP net interest income on a non-FTE basis of $570 million to $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 metric. Relative to last quarter, our outlook implies full-year net interest income excluding accretion of $2 billion, an increase of roughly $100 million or 5% from the outlook we provided last quarter. We expect loan growth for the quarter will be in the range of 2% to 3%. Given progress so far this year, that would imply a growth of around 14% since merger close, relative to our original target of 8% to 10%.
Fee income should be in the range of $105 million to $110 million, which incorporates the impact of lower fees on the outsourced consumer investment business. Core expenses are expected to be in the range of $290 million to $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, organic growth opportunities will likely occupy a greater share of capital deployment, and we will remain disciplined in evaluating opportunities to effectively deploy capital. And lastly, we are forecasting an effective tax-rate of 22% to 23%.
With that, I will turn things back over to John for closing remarks.
John Ciulla
Thanks, Glenn. We recognize we’re operating at a time of uncertainty in the macroeconomic and geopolitical landscape and that there are wider ranges of potential outcomes that it could impact the operating environment. We believe that our diversified and high-quality businesses and loan and securities portfolios, 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 with 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 2nd, 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.
And finally, thank you to my colleagues for their continued diligence and hard work as they execute on our core business initiatives while addressing the added challenge of integrating the new Webster. And I want to apologize, I understand we had some technical difficulties at the beginning of the call and I thank you for bearing with us.
Operator, Glenn and I will open it up to questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Chris McGratty with Keefe, Bruyette, & Woods.
Chris McGratty
Good morning. Thanks for the question. Maybe, Glenn, the upgraded NII guide, the $100 million. Very good — I guess, very good update. One of the trends we’ve seen this quarter is a narrative around peak NII. Wouldn’t see that — like that’s the case given this, but can you speak to growth from that fourth quarter level as you go into 2023? I’d be interested in your thoughts there. Thanks.
Glenn Macinnes
Sure. Great. So let me just start, I’ll talk a little about NIM. So just for texture, I think our ex-accretion or exit NIM in September was 3.55% and then I would think, if you look at our Q4 range, I’d probably put that in a range, again ex-accretion of 3.6%. So we continue to see NIM expansion. As we look out into 2023, I think there’s a couple of factors; one is that our modeling, we’re expecting peak fed funds in the second quarter of around 450, right.
And so given that dynamic and our beta 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 first quarter and then we see more modest NIM expansion in the back half of the year. So, I think we still feel really positive about the prospects in 2023. The dynamic here is that, even though we have higher deposit pricing which we are expecting, our asset book is repricing more significantly.
Chris McGratty
Okay, that’s great. Is the 30% — the low 30s, that’s [indiscernible] is that a total?
Glenn Macinnes
I’m sorry. Is that for all deposits.
Chris McGratty
Just interest-bearing [Multiple Speakers]
Glenn Macinnes
Yes. I’m looking at the total deposit costs. And I would say lower 30s over the course of four quarters.
Chris McGratty
Great. And then if I could, the actions you took in the quarter to clean up credit, could you just provide a little bit more color on that. I think you said you — I think there is a loan sale, maybe, I guess what prompted this? Could you consider more and I guess, how should we be thinking about the confidence in credit going into the year?
John Ciulla
Yeah. Chris, happy to talk about it and I think it’s important to talk about it. I think it was less to clean up credit and more literally to kind of optimize our balance sheet going forward. So we’ve talked publicly in the beginning that after diligence in closing the deal, we liked all the businesses, but over the next four to six quarters from close as good stewards of capital, we would continue to look at all of our businesses to see whether they remain strategic, whether the risk return dynamics were strong, whether or not there were any potential kind of credit weaknesses as you looked out over paradigm shifts and so we took the opportunity.
I mean, think about it, we grew loans around 5%, including the disposition of over $500 million in assets and 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. And if you think about it again, look at the total charges related to those actions over the — over $500 million, the average sale price was like $0.98 on the dollar. So this certainly weren’t sale of distressed assets.
And there were note sales in there, there were portfolio sales, some to regulated banks. So this was not kind of a clean-up of credit right in front of us, but obviously, in a higher expectation of spread environment. There is an interest-rate impact on the discount, on the prices and there were some note sales of non-strategic office for example that we thought would be now would be a good time to dispose. So we just thought it was a really smart move and obviously, we think it will benefit us going forward as much from a return-on-equity perspective as from an avoid credit issue perspective.
Chris McGratty
That’s great color. I agree. Good move. Should we expect more into the end of the year or is this kind of it?
John Ciulla
I don’t see anything right now. So we don’t have that in our guidance. I don’t think it’s going to be a reflection of what we do every quarter going forward. We really like the businesses we’re in. But obviously, as we said, we’ll continue to look at the dynamics of the combined portfolios. And so, if there are opportunities that makes 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, but nothing that’s in our sights.
Chris McGratty
Great. Thanks, John.
John Ciulla
Thank you.
Operator
Your next question comes from the line of Mark Fitzgibbon with Piper Sandler.
Mark Fitzgibbon
Hey, guys good morning.
John Ciulla
Hey, Mark. Good morning.
Mark Fitzgibbon
Glenn, I wonder if you could share with us what is your — the spot rate on deposits are today?
Glenn Macinnes
Sure. I know that we ended the quarter — I think we’re — let’s see, I have that here somewhere. I would put it in a range of — let me — yes, it might be — say in the range of 60 basis points, 60 basis points to 65 basis points.
Mark Fitzgibbon
Okay, great. And then secondly, just to kind of follow-up on one of the earlier questions about credit. I guess I’m curious how you guys are — when you do your modeling, how you’re thinking about the provision line?
John Ciulla
Yeah. I mean, Mark, as you know, we think a lot about the provision line and we have a relatively conservative bias, but that doesn’t always factor in particularly with CECL and the way it works now. So, I would say at a high level and then Glenn can certainly feel free to fill in. The dynamics this quarter were significant loan growth, right, which requires a higher reserve. The Moody’s scenario which us and many of our peers use was kind of worse, right, which requires in general, directionally more reserves. Then you saw our credit stats, which as I said, I used the word remarkably not to brag, just to be like surprising in this environment, right, that our NPAs and our classifieds were down materially. So that’s kind of a good guy, if you will.
And then I will tell you that 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 rating risk — the average weighted risk rating of our originations is actually better than on a 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. Then we have each sequential quarter, which ends up bringing down the overall weighted average risk rating, which again would be a good guy. So you saw those dynamics, bigger loan portfolio, more reserves, worse forward-looking economic scenarios from Moody’s, more reserves, better asset quality metrics, lower reserves and then higher quality originations, lower reserves and that’s kind of where we end up. We feel really good.
If you look at our peers, Mark, we are still top quartile, at least in terms of our reserve coverage ratios, and I’m pretty pleased with where we are. We also have a lot of capital. So, that’s kind of the way I’m thinking about it.
Glenn Macinnes
Yeah. The only thing I would add to that Mark is that, John talked about the loan growth of $2.2 billion, $20 million provision against that. And then, if you look at the macro factors, so we have $11 million on the slide here. But it’s really two things. One, if you just took out the Moody’s impact and the fact that they slashed GDP estimates. I mean that’s, probably $20 million and sort of clawing that back is $9 million, so the net $11 million of those two things and that $9 million is really related to, as John highlighted, the improvement that we see in NPLs and our folks [indiscernible] commercial classifieds, et cetera at a weighted risk metric that’s improving.
Mark Fitzgibbon
Great. And lastly, I wonder if you could give us a sense for what your loan pipelines look like today? And maybe also share with us what the commercial line utilization rates are?
John Ciulla
Yeah. I’d say, we’re still tracking all the different [indiscernible]. I would characterize the line utilization as flat to slightly up, not materially, across all of our commercial businesses, Mark. And I am not sure what that evidence is. I mean, I think still solid demand, but they’re not — it’s not expanding at a crazy margin in ABL, for example, which is usually a harbinger of faster working capital cycles. I would say flat to marginally up.
Pipeline is — 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 of quarters in kind of core middle-market areas. We have seen some slowdown in the trading of real estate assets or in the sponsor book in terms of people selling companies and buying companies. So that has an impact, but if I look just at my pipeline report, which, obviously, I did last night, it’s robust and it’s similar, as you see slightly above third quarter going into fourth quarter, where there is usually a heightened amount of activity.
Mark Fitzgibbon
Thank you.
Glenn Macinnes
Hey, Mark, before you go, let me just clarify something. I may have misunderstood the question. On our deposit cost for the second-quarter. I think we exited like at 41 basis points, but on the fourth quarter, we’re expecting that to be in the range of 55 basis points to 60 basis points, just for clarification.
Mark Fitzgibbon
Thank you.
Glenn Macinnes
Sure.
John Ciulla
Thanks a lot, Mark.
Operator
Your next question comes from the line of Casey Haire with Jefferies.
Casey Haire
Yeah. Hi, thanks. Good morning, guys.
John Ciulla
Hi, Casey.
Casey Haire
How’re you guys doing? Glenn, just to clarify. I think you meant — you said third quarter, it exited the quarter, the [930] (ph) spot rate for deposit costs ended 55 basis points, 60 basis points or you expect fourth quarter to end —
Glenn Macinnes
I said the third quarter — the third quarter right now, we’re at 41 basis points. And then as you go into the fourth quarter with our beta assumptions, we’re probably in range of 55 basis points to 60 basis points.
Casey Haire
Got you, okay. Thanks for clarifying. All right. So, I was wondering about the funding strategy in the fourth quarter underlying your NII guide here. So in the third quarter, you guys kind of had a nice balance between a rebound in the muni deposits, run down of securities and a little bit of borrowings. What is the outlook for the fourth quarter and beyond here?
Glenn Macinnes
Yes. So, great question. So if you look at our loan guidance and you say sort of take a right in the middle between 2% and 3%, you probably had [$1.2 billion] (ph) or something like that. So let’s just use that as a proxy. I think the thing that’s really encouraging about the franchise is that — we’ve pointed this out a few times that we have so many multiple levers of funding and liquidity sources, that’s really encouraging. So as I look at funding going into the fourth quarter and even beyond, some of the key drivers will be things like the continued run-off of our securities portfolio as we invest that in loans.
I think we have deposit growth in some of our commercial segments, obviously, HSA as we get towards the first part of next year. And then we have digital deposit gathering sources, whether it’s [Brio] (ph), whether it’s banking-as-a-service, things like that. And then lastly, from a liquidity standpoint, we have plenty of sources of funds as far as funds that we can draw down on, but that would be sort of last thing we do. So we continue to feel good about our funding ability.
Casey Haire
Got you. Okay. And the guide is predicated on another 100 bps of Fed hikes here. What kind of upside is there? I mean, the forward curve is at 475 by year end. What kind of upside would there be if it plays out as the curve expects?
Glenn Macinnes
Yeah. I mean, look, we’re using our estimate right now of 450, obviously, there’s more upside. You can figure it out mathematically, but I don’t — I guess, the thing I would point out is, the significance of our assets repricing and the slowness of betas coming around. So I don’t have that. Where our model has it peaking at 450, if there’s upside to that? That would be additive generally.
Casey Haire
Okay, very good. And just last one on the credit front. So the $500 million disposition, was there anything — was there any — was the sponsor and specialty finance book touched and just any color on the — if my math is right, there was about $60 million of commercial losses outside of the disposition, just any color on what was driving that?
John Ciulla
Yeah. Nothing in sponsor and specialty was disposed of. And with respect to their core 13 basis points that I reflected driven by two commercial credits, Casey, one of which had been classified since pre-pandemic and finally capitulated, neither of them were in the same geography asset class or kind of had anything that I would say is systemic in there, I feel pretty good about 13 basis points of charge-offs at this point in the cycle, so nothing to say except two unique credits that ended up having a loss given [indiscernible] at the end of the day, unfortunately.
Casey Haire
Understood. Thank you, guys.
John Ciulla
Thank you.
Operator
Your next question comes from the line of Steven Alexopoulos with JP Morgan.
Steven Alexopoulos
Hey, good morning everyone.
John Ciulla
Hey, Steve.
Steven Alexopoulos
I wanted to start on the deposit side. So if we look at non-interest bearing deposit balances, you actually had pretty decent growth in the quarter, while banks everywhere were seeing outflows. How did you buck the trend in the quarter and do you now expect to see outflows of those moving forward?
John Ciulla
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? And so 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 first quarter. So, I think we did it largely because we’ve got really sticky deposits in our retail franchise.
I think we’ve got really good commercial solid deposits with our relationships, but I would have to say that 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. So as Glenn said, I think what’s great right now about the way that our balance sheet is made up is we do benefit from this asset sensitivity significantly. Obviously, we’re taking prudent measures to make sure whenever the time comes when Fed fund rate comes down, we were protecting our cash flows, but 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, but we’ve got HSA, we’ve got the direct bank in Brio which is a higher cost deposit, but nonetheless, a deposit that we found to be stickier than we originally thought it would be. And then we’ve got obviously all the diversified business banking, commercial segments, small business and retail.
So it’s going to be work and we’re continuing to focus on it, right, because if you’re growing loans at the clip we are, we need to make sure that we’re continuing to generate good sticky deposits going forward, but we’ll take the victory of growing deposits in the quarter, but we also did benefit from government seasonality.
Steven Alexopoulos
Okay. John, can you size that for us? What was that benefit from the seasonal inflow from government deposits?
John Ciulla
Well, I think it was about $800 million, Steve.
Glenn Macinnes
Yeah, quarter-over-quarter, right, so then there was sort of a decline in the commercial. I think we have [indiscernible] and offset by some wholesale funding.
Steven Alexopoulos
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?
John Ciulla
So we feel good about operating in the high 80s% to 90% range given the environment today. So that’s where I would expect it to be. In fact, as I look out over the next couple of quarters, that’s where — that’s exactly where it is.
Steven Alexopoulos
Got you, okay. Thanks. And then finally, so, regarding the acquisition of People, 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 there for you? You’re the bank I think of most that could benefit from what’s going on there? And have you seen any increase in client acquisition related to all the negative news on that? Thanks.
John Ciulla
Steve, you can’t ask that — you can’t get me on that question. I have such respect to that bank. Look, we’ve talked about this in the past that it’s interesting in a lot of our key businesses, we really don’t overlap with Peoples, and we didn’t overlap with Peoples, and we don’t overlap with the combined M&T Peoples. There obviously had been some disruption. Peoples Bank clients are loyal because Peoples is a really good bank. There are opportunities, obviously, with colleague disruption there as well, because that’s not an MOE, it’s an acquisition. And so there are opportunities from a personnel perspective and from a client perspective over time. But, as I said, it’s a good bank and I wouldn’t want to comment on specific opportunities.
Steven Alexopoulos
Okay. Fair enough. Thanks for taking my questions.
Glenn Macinnes
Thanks, Steve.
Operator
Your next question comes from the line of Matthew Breese with Stephens Inc.
Matthew Breese
Good morning.
John Ciulla
Hi, Matt. Good morning.
Matthew Breese
Hey, John, you alluded to this earlier, just talking about maybe a softening of loan growth next year, but I was hoping you could better kind of frame that for us. I think historically, you’ve always positioned the bank to be kind of a high single-digit grower. Obviously, the company in 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.
John Ciulla
Yeah. No, great question. And we’re sort of not changing guidance. I think we’re 8% to 10% year in and year out. This year, I think we’ve been selective. We’ve got a couple of categories that have really driven growth and I think we’re fortunate that they tend to be categories with lower loss given default, which I’m happy about in this cycle.
As I mentioned earlier to one of the questions, our pipeline remains robust. I think we’re going to have the ability and the luxury and I think many of our competitors will as well be a little bit more selective on rate and structure just given the fact that some of the nonbank lenders and their cost of funds and other dynamics are changing the nature of the marketplace. So I still feel like when we made the announcement in April of 2021, one of the premises of the deal was that we on a combined basis could grow our commercial loans 8% to 10% year in and year out.
We’re obviously benefited by a bigger balance sheet and higher hold levels which we’ve talked about. So even if the loan market and loan demand slows a little bit, some of the niches and verticals and relationships that we have continue to enable us to grow loans. So in our model, we’re still looking at 8% to 10% loan growth next year, regardless of kind of what the overall demand environment is. And I believe we can do it safely. If — we don’t want Jason on the call, obviously, because you never want your Chief Credit Risk Officer on the earnings call, that generally portends to bad things. But if he were here, 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% to 10%.
Glenn Macinnes
The only thing I would add to that is, when you look at the quarter, I think our originations were probably about — and this is the third quarter, at about 5.20% — 5.2%, right? And so as we look out, it’s probably going to be closer to the range of like 550 to 600 origination rates.
Matthew Breese
Understood. Okay. And then could you just talk about digital deposits, the balances between Brio Direct and then the Banking as a Service segment? And how much of your funding projections should we be thinking rely on these buckets versus traditional street retail and commercial?
John Ciulla
Yes, Matt, sure. And I think I’ve been pretty consistent in saying we’ve tried to lean in, in those areas. Obviously, Brio is up running and proven and we’re able to generate some deposits there. We did in the second quarter, we did in the third quarter. Glenn can give you the number. As it relates to Banking as a Service, I don’t know whether this is a pivot in narrative. But in the second quarter, I talked about the fact that we have three or four relationships that are live with a pipeline of about $500 million to $750 million of deposits, but 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 core deposits and drive kind of liquidity. We’re not factoring in significant funding from the BAS channel over the course of 2023. So we’re not relying on that in our model. That would be upside gravy. With respect to Brio, we do expect to have that as part of our arsenal and maybe, Glenn, you can [Multiple Speakers]
Glenn Macinnes
Yeah, sure. So, I think — just to start like, digital direct is probably about $1.1 billion right now. And so with the biggest driver of that being Brio. But as you know, Brio is like more of a higher beta type product, but it is a lever that we have that we can get good funding. And as long as we’re turning it into loans in the range of 550 to 600, that’s a pretty good funding source. So I think Brio is one channel that we have that we can pull the lever, we can adjust that pretty quickly. And then as John mentioned, the banking as a service and stuff like that.
But more importantly, I think besides securities portfolio running off, we expect to have deposit growth in commercial segments. HSA, as you know, will come in in the first quarter. That’s the enrollment period. So we should see a pop on the HSA as well. So there’s — again, I keep coming back to because I think it’s really unique for us is that we have so many multiple sources of funding that will continue to distinguish us. And certainly, it’s playing out in our financial forecast.
Matthew Breese
Okay. Thank you. And then last one from me, just going back to the loan sale. I think there’s been some lingering questions on whether or not there were areas of the Sterling portfolio that would eventually be exited or continue to be part of the story. Did the loan sale have anything to do with kind of legacy Sterling ancillary segments? And if so, what were those?
John Ciulla
Yes. I’m not going to talk specifically. I think the overall theme is, both banks had kind of suboptimal risk return businesses. And as we work through them 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. So I guess I’m trying not to be [indiscernible]. I think the answer is kind of 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 going to be able to get return for the appropriate risk or as I said on a couple of select note sales in key areas where there may be paradigm shifts like office, we were able to kind of lighten our exposure.
So I’m going to leave it at that. And I don’t think it’s a worry. You characterize it as kind of like a worry, but there are subscale and suboptimal businesses that we will over time figure out whether or not we want to accelerate or whether we want to exit and whether that exit is a loan sale or just a winddown of the business that will happen over time. But right now, we love the portfolio of assets. We like the credit quality a lot in the entire bank when you bring all the portfolios together.
Matthew Breese
Understood, okay. That’s all I had. Thanks for taking my questions.
John Ciulla
Thank you.
Operator
Your next question comes from the line of Jared Shaw with Wells Fargo Securities.
Timur Braziler
Hi, good morning. This is Timur Braziler filling in for Jared.
Glenn Macinnes
Hey, Timur.
Timur Braziler
Hey, guys. Maybe just starting on the bond book and using that as a source of funds, does that slow with the expectation that loan growth slows? And does that pretty much end in the first quarter as HSA seasonality kicks in? I guess what’s a good kind of base we should be thinking about for the bond book?
Glenn Macinnes
So no, I think you would continue to see — first of all, it has extended with the rising rates. So our cash flow has come down a little bit, but still for the quarter, if you’re using something in the range of like $250 million, I think that’s pretty good, right? So that’s how I would generally model it. But we continue to reinvest and what came off in the quarter — in the third quarter was like $238 million. It came off at 2.83%, right? So if we can reinvest that in loans, you can see the spread difference, right? So, we’ll continue to do that as a source of funding for loans going forward. Did you have a second part to that question?
Timur Braziler
Well, just with HSA coming on in the first quarter and that being used as a fund [indiscernible] that kind of slow in ’23? Or is that the strategy that will be used in ’23 as well?
Glenn Macinnes
I mean, I think we’ve talked about this, but I think if you look at total book at $15 billion, we sort of think of it as — part of it is that the deployment of the excess liquidity we had back a couple of quarters ago. And so that’s done well for us from an earnings standpoint, but it’s always been our attention to sort of move that into the loan book and pick up 150 basis points or now 200 basis points in doing so. So even with HSA coming in in the first quarter, given our loan growth for the year, I think that will still be a good source of funding for us.
Timur Braziler
Okay. And then 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?
John Ciulla
Yes, 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. And 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 saves. This wasn’t the cost save deal, only 10% of the combined cost save, 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. And I think that’s proven out.
So when we get the technology integration and conversion done next July, I don’t think that 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. We still have another 12 months to 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 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 will change the trajectory of revenue growth.
Timur Braziler
Okay, great. And then just last for me, more of a modeling question. The scheduled accretion guide of $14.6 million in 4Q ’22, do you have any visibility as to what accelerated accretion in the quarter could be, just kind of looking at the delta between third quarter accretion and the fourth quarter guide? And I guess for the third quarter accretion, was any of that component driven by the loan — the $500 million of loan sales, that kind of drive any of the accelerated accretion component there?
Glenn Macinnes
No. I mean this is generally, its prepayments. I mean accretion is down obviously quarter-over-quarter, but there’ll be volatility. Look, when we announced and put in the — you see the impact of purchase accounting back on page 18 on the slide, but that was just based on scheduling. And obviously, as customers prepay and stuff like that, that will accelerate, right? I think there’s probably about seven — maybe smaller amount, it’s probably $600,000 to $700,000 due to the loan sale in that accretion note. It’s not meaningful.
Timur Braziler
Okay. But looking at the — I guess, it’s hard to look at the paydown schedule, but should we be assuming a similar level kind of accelerated accretion in the fourth quarter or is that —
Glenn Macinnes
Well, we gave it to you. We laid it out for you there. It’s like on the loan side, its $17 million, right? And that’s our best estimate right now, Timur, it could change based on prepayment activity and stuff like that.
Timur Braziler
Got it. Great, thank you.
John Ciulla
Thank you.
Glenn Macinnes
Thanks.
Operator
Your next question comes from the line of Laurie Hunsicker with Compass Point.
Laurie Hunsicker
Yeah, hi, thanks. Good morning. On AOCI, what was that intangible common equity this quarter on a dollar basis?
Glenn Macinnes
Without AOCI?
Laurie Hunsicker
No, no. Just what was AOCI drag in the intangible common equity?
Glenn Macinnes
So AOCI in the third quarter impact was — its $688 million, right, that’s after tax. So that’s an increase of about $242 million quarter-over-quarter.
Laurie Hunsicker
Perfect, perfect. Okay, great. And then 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 offset? And then kind of what were the other larger components in there? And then 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 NYC, I guess, proper, do you have a refresh on what that is as of 3Q? Thanks.
John Ciulla
Sure. Sure. I’m happy to do that. So the impact on our office exposure between the asset sales and other just general amortization and payoffs is about $75 million. So 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. And the rest of the stuff related to kind of general C&I activity in terms of the $500 million, so general C&I businesses. I would say that if to refresh office, if you recall, there’s not really a material change except for the $75 million or so reduction. So we talked about $2.2 billion in total office exposure, about a little over $500 million of which was kind of stabilized medical office, which has a much better operating profile and I think is not subject to paradigm shifts that would impact traditional office.
So if you take that $1.7 billion remaining roughly, about half of it is Class A. The other half is Class B, C, which is what we’re focused on the most. So again, take the maybe 50-50 of the asset sales, you’re down to about $800 million in terms of B, C 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 contents there, although we’re not taking our focus off of it. So — and obviously, evidenced by the fact that some of our discrete node sales were in that category, Laurie. But also again, reminding you that we sold all of those loans at a combined rate of $0.98 on the dollar. We weren’t selling loans with identified loss content, we’re just making decisions to kind of eliminate non-strategic assets that over time could have a lower value.
Laurie Hunsicker
Got it, okay. And 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?
John Ciulla
Let me check, maybe it’s for — oh, I think medical is also in that, Laurie. So nonmedical office in New York, around $400 million.
Operator
And at this time, there are no further questions.
John Ciulla
Great. Thank you very much for joining us today and have a wonderful day.
Operator
This concludes today’s conference. You may now disconnect.
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