Webster Financial Corporation (NYSE:WBS) Q4 2022 Earnings Conference Call January 26, 2023 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
Matthew Breese – Stephens Inc.
Casey Haire – Jefferies
Alex Lau – JPMorgan
Jared Shaw – Wells Fargo Securities
Manan Gosalia – Morgan Stanley
Laurie Hunsicker – Compass Point
Jon Arfstrom – RBC Capital Markets
Operator
Ladies and gentlemen, good morning, and welcome to the Webster Financial Corporation Fourth Quarter 2022 Earnings Call. Please note that 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, I want to remind you that the comments made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the Safe Harbor rules. Please review the forward-looking disclaimer and Safe Harbor language in today’s press release and presentation for more information about risks and uncertainties which may affect us. The presentation accompanying management’s remarks can be found on the company’s investor relations site at investors.websterbank.com.
I’ll now turn it over to Webster Financial’s CEO, John Ciulla.
John Ciulla
Thanks, Emlen. Good morning, and welcome to Webster Financial Corporation’s Fourth Quarter 2022 Earnings Call. I am going to provide remarks on our strategic execution, high-level results, merger integration and strategic actions before turning it over to Glenn to review our financials in more detail.
Our strategy is straightforward and remains unchanged from the day we announced our merger in April of
2021.
Opportunistic and prudent growth in targeted areas where we have competitive differentiation while continually see enhancing a diverse and advantageous funding profile. We continue to deploy capital and expense dollars into business activities that maximize shareholder returns and economic profit.
We are delivering on this strategy as a unified Webster while at the same time executing on the integarion of our merger with Sterling. We continue to exhibit solid credit performance, and we are conservatively positioned in our capital levels and loan loss allowance.
The net results of executing on this strategic plan are evident in our performance this quarter. On an adjusted basis, we generated EPS of $1.60 versus $1.46 last quarter and our PPNR grew 9% quarter-over quarter or by $35 million. Both our GAAP and adjusted EPS numbers are a quarterly record for Webster.
Underpinning our performance, our net interest margin expanded 20 basis points and loans grew over 4% in the quarter with further moderate NIM expansion and solid loan growth in our 2023 forecast. With respect to our 4Q loan growth, we again focused our origination activities in asset classes with stronger credit profiles, such as public sector finance and fund banking.
For the fourth consecutive quarter, the weighted average risk rating of our commercial originations were significantly stronger than that of the existing portfolio, which is intentional when operating in a more uncertain macro environment. We also enhanced our liquidity profile with the acquisition of interLINK, and we continue to have a solid capital position.
These results produced an adjusted ROA of 1.61%, a return on tangible common equity of nearly 23% and an efficiency ratio of 40%. All of these figures meet or exceed the pro forma metric targets we detailed at the time of our merger announcement.
While aided by a beneficial interest rate environment, we are also delivering on our operational efficiencies, growing loans in excess of our original targets and realizing new business opportunities from the merger. We believe that our business can drive solid operating leverage and PPNR growth through a variety of macroeconomic operating environments and interest rate backdrops and our goal is to generate consistent earnings and revenue growth throughout operating cycles.
We also feel confident that we can operate with an efficiency ratio in the low 40s without sacrificing our ability to continue to invest in franchise enhancing and differentiated businesses. In fact, in Q4, we invested several million dollars in expanding our commercial banking activities, which should result in future growth over the coming years.
The strength of our franchise is also evident in our annual results, which you can see on Slide 3. On a full year basis, we grew our adjusted EPS to $5.62 from $4.85 in the year prior and our return on tangible equity increased to 19.8%. We accomplished these results with a full year efficiency ratio of 43% and post-merger loan growth of 15%, ahead of our 8% to 10% expectations.
We are certainly proud of the financial metrics achieved in the first year since merger closing, but we may be even prouder of what we’ve accomplished from a culture and talent perspective. We have an incredibly aligned and talented management team and a clearly defined values-based culture that is coming together ahead of our initial expectations.
One of the keys to our performance, culture building and client retention as a company has been the consistency, continuity and execution of our client-facing colleagues, among whom we have experienced virtually no loss of talent over the last two calendar years since deal announcement.
Before turning it over to Glenn, I want to provide a brief overview of our acquisition of interLINK, which closed earlier this month and provides us with tremendous core funding optionality adding to what we believe is an already differentiated deposit funding profile.
Deposits we access via interLINK are considered core from a regulatory perspective, have an extremely low cost of acquisition and thereby an attractive all-in cost profile, which works well in all rate scenarios. And most importantly, it can be scaled up or down relatively quickly according to our funding needs.
Operationally, interLINK administers FDIC insured deposit suite programs between broker-dealers and banks, such that broker-dealers’ customers receive FDIC insurance on idle cash balances in their account. We currently administer around $9 billion in deposit balances in the program, a substantial portion of which Webster could access over time. There is a small portion of the deposits we would not access to ensure that customers in the program receive maximum FDIC insurance coverage on their balances.
We collect a small fee on deposits that we do not hold on our balance sheet. It’s only been two weeks since closing and we’ve already had great success with the program. We’ve begun utilizing deposits on our balance sheet as a replacement for wholesale funding without changing our risk tolerances in terms of asset generation.
And we’ve signed up a brand new broker-dealer contract just last week. We are also excited about potential other revenue synergies with our broker-dealer partners.
We are pleased with our performance in the quarter, excited about how we are positioning the company for the future and confident in our ability to consistently deliver top-tier financial performance as we take care of our clients, our colleagues and our communities.
With that, I’ll turn it over to Glenn for the financial review.
Glenn MacInnes
Thanks, John, and good morning, everyone. I will start with a reconciliation of core earnings on Slide 6. We reported GAAP net income to common shareholders of $241 million with EPS of $1.38. On an adjusted basis, we reported net income to common shareholders of $278 million and EPS of $1.60, each of which exclude onetime after-tax expenses of $37 million.
Merger expenses were related to real estate consolidation, severance and professional fees. The strategic initiative expense is primarily repositioning of our securities portfolio. .
Next, I’ll review balance sheet trends before moving on to the income statement. On Slide 7, at period end, total assets were $71.3 billion, with total loans of $49.8 billion and total deposits of $54 billion. Loan growth of $1.9 billion was primarily driven by Commercial Banking, which increased $1.6 billion. Deposits were essentially flat quarter-over-quarter.
I will provide additional detail for both on the next two slides. Slide 8 highlights the diversity of our loan growth by category, a great illustration of the breadth of our business lines. In total, we grew loans $1.9 billion or 4.1% on a linked-quarter basis.
Growth for the quarter was in the following verticals: commercial real estate, $756 million; fund banking, $520 million; sponsor $428 million and residential mortgage, $345 million. This was partially offset by lower mortgage warehouse lending of $252 million. Quarter-over-quarter, the yield on the portfolio increased 73 basis points and excluding accretion increased by 80 basis points.
Switching to deposits on Slide 9, total deposit balances were essentially flat from prior quarter. This was the net result of a reduction in public funds, which were down seasonally by $1.1 billion and offset by wholesale deposits as we used a greater number of sweeps and other alternate sources of funds. The total cost of deposits increased 60 basis points – to 60 basis points from 28 basis points prior quarter. Our effective beta was 22% in the quarter and 15% for the year.
Beginning on Slide 10, I’ll review the details of our income statement. We provided our reported to adjusted income statement by line item and compare our adjusted earnings to the third quarter. Net interest income grew by $51.4 million or 9.3% linked quarter, driven by our origination volume and a higher rate environment.
The growth in net interest income drove meaningful improvement in PPNR, net income and EPS. On an adjusted basis, PPNR was up $35 million or 9.5%. Net income was up $21 million or 8% and EPS was up $0.14 or 10%. I will cover the individual line items in more detail on subsequent slides. The net interest margin was 3.74%, up 20 basis points on a reported basis and our efficiency ratio was 40%, down 90 basis points from prior quarter.
On Slide 11, net interest income grew $51.4 million relative to prior quarter. Adjusted for accretion in both periods, net interest income was up $58.3 million. This was our third quarter of strong results driven by both loan growth and the asset sensitivity of our balance sheet. Excluding accretions, the net interest margin increased 24 basis points to 3.68% and the earning asset yield was up 70 basis points in the quarter.
As illustrated on the earlier slide, the cost of deposits increased 32 basis points quarter-over-quarter. We anticipate further deposit rate increases in the coming quarters and through the cycle cumulative beta of roughly 25% excluding mix shift effect – the mix shift effects from wholesale funding into interlinked – from interlink deposits.
On Slide 12, we highlight our fee income for the quarter. On an adjusted basis, fees were down $7 million linked quarter. The linked quarter decrease was driven primarily by the outsourcing of our consumer investment services platform, as well as a number of smaller items and other fees. The year-over-year decline was a result of lower income in direct investment and mortgage banking fees, as well as the outsourcing of our investment services.
Slide 13 summarizes non-interest expense. We reported adjusted expense of $302 million relative to prior quarter of $293 million. We continue to make progress on cost efficiencies related to the merger.
However, this quarter included increased levels of performance-based compensation, benefits expense and a strategic investment in Commercial Banking. The year-over-year increase of $2 million is a combination of our cost save efforts to-date, offset by the increase in intangible amortization, the Bend acquisition and performance-based compensation.
Slide 14 highlights our allowance for credit losses, which was up $21 million over prior quarter. After recording $20 million in net charge-offs, we recorded $41 million in provision expense with loan growth representing $20 million of the increase and macro factors adding $21 million.
Slide 15 highlights our key asset quality metrics. On the upper left, nonperforming assets declined $6 million from prior quarter and represented 41 basis points of loans. Likewise, commercial classified loans declined $4 million and represents 150 basis points of total commercial loans.
Net charge-offs on the upper right totaled $20 million or 17 basis points of average loans on an annualized basis and the allowance coverage ratio remained flat period-over-period at 120 basis points. The allowance to non-performing loan ratio increased to 2.9 times, up from 2.7 times last quarter. Coverage as a percent of commercial classified loans increased to 99% from 95% prior quarter.
Our capital levels remain strong as illustrated on Slide 16. All capital ratios remain well in excess of regulatory and internal targets. Our common equity Tier 1 ratio was 10.71% above the medium-term operating target of 10.5% and tangible common equity ratio was 7.38%. Tangible book value per share increased $1.38 to $29.07 a share, driven by our strong earnings growth.
I’ll wrap up my comments with our outlook on Slide 17, where we provide our full year projections. Our expectation for the rate curve is that the Fed funds peak at 5% in Q2 and end the year 50 basis points lower. We expect loans to grow in the range of 6% to 8% with diverse growth across all business lines. We expect deposits to grow 4% to 5% excluding the impact of interLINK.
The acquisition of interLINK provides flexibility in funding our forecasted loan growth. Given that in the structure of our balance sheet, our full year outlook for net interest income, excluding accretion is around $2.5 billion.
On the slide, you see the range of expected results. We expect $25 million in accretion that would be added to the net interest income outlook. For those modeling net interest income on an FTE basis, I would add roughly $65 million to the outlook.
Fee income should be in a range of $415 million to $430 million, which incorporates the full year impact of lower net fees from the outsourcing of our consumer investment services platform, as well as lower derivative income.
As the range in our outlook illustrates, core expenses are expected to be around $1.2 billion to $1.225 billion, which will continue to result in an efficiency ratio in the 40% range. 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 are forecasting an effective tax rate of 22% to 23%.
With that, I’ll turn it back over to John for closing remarks.
John Ciulla
Thanks, a lot Glenn. We are systematically executing on our merger integrations and our core conversion timeline remains unchanged with final conversion targeted for the middle of this year. We continue to consolidate systems sitting on top of our core technology, which enhances our colleagues’ capabilities and simplifies the conversion process, as well as our operating processes.
We’ve also wrapped up our previously detailed corporate real estate consolidation. While a tremendous amount of effort, as you can imagine, is going into ensuring a smooth systems conversion, all of the business lines have turned the page and are functioning as a unified Webster from an operating relationship management and client service perspective.
Our strategic vision and values are integrated, our operating structure is established and performing at a high level and across the bank, we are focused on delivering for our clients.
2022 overall was a terrific year for the Bank. Our commercial loans grew 17% for the full year. We maintained a relatively low cost of funding as our transactional deposit balances, including HSA deposits positioned us well for a higher rate environment and we should continue to benefit from a relatively lower cost of deposits in 2023.
We added to our technology-enabled businesses with the acquisition of Bend at HSA Bank and the announcement and subsequent close of the interLINK transaction, while also investing in digital enablement across the Bank, all of which enhances our differentiated funding profile. During the year, we repurchased $320 million in stock enabled by our strong capital position and capital generation capability.
As we look forward for the rest of this year, we understand that the macroeconomic environment remains uncertain. However, we are confident in our ability to generate solid operating results regardless of how the year plays out with respect to the economy.
Our ability to operate a highly profitable company starts with our competitively differentiated business lines and our diversity of funding channels, our efficient operating structure at 40% efficiency, an agile approach to our business and importantly, very importantly, prudent enterprise and credit risk management across our organization.
These attributes should allow us to generate industry-leading results, both in the near term and for years to come.
As we wrap up, I am sure most of you saw our announcement, but I just want to highlight that we’ll be holding our 2023 Investor Day on March 2 in New York City, where our talented management team will provide an extensive view of our disciplined approach to managing our business, our go-forward strategies and the significant opportunities for growth we have in front of us.
We’ll also have an opportunity to do a deep dive on our loan portfolios, enterprise and credit risk management frameworks and how we view our role importantly as a responsible community-focused corporate citizen. I look forward to seeing many of you there.
Finally, I want to thank all of our colleagues at Webster. The outstanding results we announced today are a direct result of their hard work and commitment to the culture and the focus on our clients.
Operator, Glenn and I will open it up to questions.
Question-And-Answer Session
Operator
[Operator Instructions] And we will take our first question from Chris McGratty with KBW. Your line is open.
Chris McGratty
Great. Good morning.
John Ciulla
John Ciulla
Hey, Chris.
Chris McGratty
Hey, John. Hey, John. I guess, maybe a question on the InterLINK deal, your stock has traded heavy over the past few weeks I think because of some concerns about liquidity and I think the quarter was very strong. Could you help us with just how you plan on using InterLINK and maybe it feels like arbitrage on the deposits just from a classification but what are the rates that are on these versus the borrowings in the quarter and just how much growth do you expect to put on the balance sheet? Thanks.
John Ciulla
Yes. Glenn can give you some more detail on the cost of the deposits? Look, it is interesting, right? We’ve gotten a lot of feedback, some saying, boy! they had a liquidity issue. They needed to beef up their liquidity. On the other side, concerns that we were going to take $9 billion and generate and accelerate loan growth into an uncertain macro environment.
Neither of those are the case, Chris. We looked at this as a long-term opportunity from a position of strength to further enhance our optionality on funding sources. So, if you look at us, even in a quarter like this quarter where we had seasonally low government deposits and we haven’t yet seen the first quarter inflow of HSA deposits, our loan-to-deposit ratio, even after $2 billion of loan growth still comfortably in the low 90s.
And in the first quarter, we’re going to be $300 million or $400 million of HSA deposits flow in. We’ll have government seasonality work to our advantage. So, we’re not constrained at all from a growth perspective and a funding perspective. But we looked at this as an opportunity to give us in terms of our three to five year plan, optionality around how we can fund our growth with core deposits and it can replace wholesale funding.
It can help us if we do have acceleration of loan growth when we get the all clear from the economic environment, it can help us there, as well. So we looked at this as a really opportunistic acquisition for us and we think when you add it to BRIO, our direct bank and you add it to HSA and you add it to our sticky core retail deposits and our commercial deposits and our government deposits, we are in a position now where we continue to build out this really diversified and broad funding source and we think this is a really good addition.
Glenn MacInnes
Yes, Chris, I would just add, if you think about it from a cost standpoint, FHLB but use it as a proxy, we are paying about – I think for the quarter, we’re like 438 all in on FHLB and this is probably a product that has — it’s priced at like Fed funds plus 10 to 15. So really, it’s just moving the geography of our funding and actually increasing our core funding ability.
Christopher McGratty
Okay. That’s helpful. Thank you. And maybe on credit, last quarter, you moved off roughly $0.5 billion, which I don’t know got enough attention of riskier credits. Can you just, John, make a comment or two on how you are feeling about certain portfolios? Obviously, the sponsor book is a lot of attention. And also remind us, your ACL is 1.2, but do you have that stat with the marks? Thanks.
John Ciulla
Yes, no, I think all really good points. Obviously, that’s right the focus of everyone following the industry is what we are going to see here from an economic perspective and what the impact is going to be on credit. So far, again, obviously, we’re pretty pleased with where we are. We, interestingly, write NPAs come down and classified has come down both on a real dollar basis and on a percentage of portfolio basis, I did make the comment around the quality of our originations.
We’re being very thoughtful around trying to avoid cyclical businesses and stick to our knitting in areas where we think there’s a lot of resiliency.
From a – we did shed about $0.5 billion strategically and I think that was a really good call just in terms of the way the markets continued to move in the third quarter. Chris, we didn’t have any material moves like that in terms of portfolio sales in the fourth quarter.
Our charge-offs, which are lower than prior quarter do include some losses taken on sale of loans, not loans that have gone through a foreclosure process, but again, being proactive. A couple of office deals are in the four or five commercial charges that we took that make up the $20 million. So we are still being really proactive from a balance sheet management perspective.
And as we mentioned last quarter, when we – as we look into 2023, we are kind of right now currently evaluating all of our commercial niche businesses to see whether we’ve got some businesses that are subscale or are there portfolios that we’re concerned about.
We didn’t take any material actions in the fourth quarter and right now, quite frankly, we don’t see any urgency in terms of deteriorating credit performance. More broadly and I don’t want to ramble on forever. But more broadly, we’re still focused on office because we think not only does the economic environment impact it, but as you probably talk to all the companies you cover, people are just concerned about the paradigm shift there.
And so, we still are in a pretty good position in terms of risk ratings there, rent rolls, classified. So, we’re not at all panicked. We’re focused on it a lot, but also really focused on all of our risk selection moving forward. So, pleased with where we are now. We haven’t really seen the deterioration. I think that people across the industry would have anticipated.
I think the whole industry is feeling that way, but we’re certainly being more proactive in how we manage our balance sheet, how we select onboarding credits, making sure we’re doing more frequent and deep portfolio dives on what we have in our book right now.
Christopher McGratty
Just, if I could. You mentioned office. Can you provide the updated exposure, anything on watch, classified non-accrual, any trends there? Thanks.
John Ciulla
Sure. Our classifieds are down a little bit. Let me pull it up. I think we are about $1.5 billion in total office exposure now. And when I say total office exposure, it’s kind of traditional white collar, it’s not including the medical office, which, as you know, is performing really well across the board anyway. And so, I think our –let’s see.
Yes, we’ve had a slight decline in classified. Some of that probably have to do with the fact that we’ve been lightening up on the portfolio. But again, we haven’t seen any material deterioration in the portfolio and what we’ve been doing is kind of selecting those Class-B and Class-C office loans which representa about half of that $1.5 billion. We’ve been kind of looking at them and trying to think about whether or not there is particular vulnerability and then seeing whether or not we can exit those credits kind of before maturity. And so, I think I would characterize it as we come down from $1.7 billion through actions. We are at $1.5 billion. It’s about 50:50 Class A and Class B, C and we’ve seen sort of stabilization in the general credit characteristics of that portfolio, but we still are, like everyone else, concerned about the long-term nature of that asset class.
Christopher McGratty
Great. Thanks, John.
John Ciulla
Thanks, Chris.
Operator
And we will take our next question from Mark Fitzgibbon with Piper Sandler. Your line is open.
Mark Fitzgibbon
Hey guys. Good morning.
Glenn MacInnes
Hey, Mark.
John Ciulla
Hey, Mark. How are you doing?
Mark Fitzgibbon
Good, thanks. Just a quick follow-up on the office portfolio stuff. Of the $1.5 billion, is most of that in Metro Boston, Metro New York?
John Ciulla
It is not – I would say, yes, there is probably about half, Mark. Actually, that’s not true. Hang on. Latest data, I have about 25% of our office exposure is five boroughs.
Mark Fitzgibbon
Okay. And the Boston portfolio is relatively small downtown Boston?
John Ciulla
Yes. I would say probably 10% to 15% of the portfolio.
Mark Fitzgibbon
And if you looked at the average LTVs on that book and at origination, what do those look like?
John Ciulla
Yes. The weighted average LTV, the last time we updated this at the end of the third quarter, we were about 53% weighted average LTV. And I am actually reading this as we go through it right. Our criticized and classifieds have gone down from about 8.7%, 6.6%, and that improvement is probably also because we’ve lowered the overall amount of the portfolio. So, pretty decent stability, Mark, right now. But as I said, we continue to watch that like the rest of the industry does.
Mark Fitzgibbon
Okay. Great. And then, I wondered if you could share with us how the renewal season in the HSA business is shaping up. I thought I heard you say $300 million or $400 million of new HSA deposits coming in. Did I hear that right?
John Ciulla
Yes, sure. You did and I know we historically have always answered this question in this earnings call by saying we’ll be able to provide you more confident and detailed information when the first quarter is done. But I can tell you this, it looks like we’re a couple of percentage points higher than the last enrollment season’s growth.
I think we expect about 325,000 new accounts to come in the first quarter and we’re maybe 65% of the way there, which is kind of slightly ahead of where we were last year. And as I mentioned, the expectation is for $300 million or $400 million. It’s always harder to predict the deposits because of initial deposits into the new accounts, how the funding works and whether or not there is any attrition in those numbers.
But I think that’s good enough to give you a comfort level as to what we feel we’re going to achieve and then obviously, in the first quarter and at Investor Day, we’ll give you a deep dive, and we’ll tell you exactly where we are.
Mark Fitzgibbon
Okay. Great. And then lastly, Glenn, I wondered if you could share any thoughts on the outlook for the provision over the next quarter or two?
Glenn MacInnes
Yes. So we’re at 120, as we reported in the quarter, it’s been basically flat. We’re at the top quartile of our peer group. So we feel really good about that. I think it will be impacted by loan growth as we go over the next couple of quarters, but more importantly, the macro environment and that’s where the challenge is. And so we did build in the quarter and there was about $20 million of build that was related to the macro environment.
So it’s hard for me to handicap, but I think our coverage ratio could drift up if we do see us going into a light or a slowdown in the economy. But that’s all I can tell you right now.
Mark Fitzgibbon
Thank you.
John Ciulla
Thanks, Mark.
Operator
And we will take our next question from Matthew Breese with Stephens. Your line is open.
Matthew Breese
Good morning.
John Ciulla
Hi, Matt.
Matthew Breese
I wanted to touch on the NII outlook, the core NII outlook. It looks like it averages about $600 million for the quarter, but as you alluded to, there is going to be some, the Fed fund is going to go higher and then potentially get some cuts towards the back half of the year. So I was hoping to get an idea of cadence and where we might see kind of the year-end NII.
Glenn MacInnes
Yes. Good. I’ll take that. So Matt, I think, look, if we look at it, these numbers are ex accretion, right? So if you think about our fourth quarter, 368 ex accretion. And I would probably say that by year-end, we end in the range of like the mid-370s. So, going into the first quarter, it sort of tapered by two less days, but then we start getting a little bit of expansion over the next couple quarters.
And that’s a sum of a lot of factors. Obviously, it’s – it is – we do think this is based on a forecast where Fed funds peaks in the second quarter, 5% and then comes down by the end of the year, like I said, 50 basis points. So there is that – there is the loan origination volume. There is an assumption on data, but that’s where we ended up.
Matthew Breese
Okay. And mid-370s, just to clarify, you’re alluding to the core NIM.
Glenn MacInnes
Yes, core NIM, excluding accretion.
Matthew Breese
Understood. Okay. Going back to HAS, so a couple days ago, we received the pricing on a $380 million book of HSA deposits sold in November. It looked like it’s sold for a near 25% deposit premium. Given the size of your book and the current valuation of the overall company, it certainly doesn’t feel like you’re getting that kind of valuation recognition.
With that in mind, I would love your thoughts on the underlying value of HSA and how to either better showcase it within Webster or get your thoughts on potentially achieving it elsewhere?
John Ciulla
That’s a great question, Matt and it brings back the days when we answered this question more frequently. Look, I would agree with you right now that just in terms of the overhang in the banking industry and valuations of bank stocks, right, it’s hard to kind of do with some of the parts valuation and see that you are getting full value for differentiated assets. No matter who you are and what you own right now, just given concerns about credit and interest rates.
We have said, over and over again, we continuously evaluate the HSA business and we continue to come from a pure economic profit perspective to the conclusion that our advantage of owning and wholly owning that business and our ability to deploy low-cost, long-duration deposits into the growth of our business and holistic relationships creates the most value over the long term.
And what you’ve seen here is, throughout interest rate cycles, you have seen us start to get recognition for having that business because of its unique growth trajectory, the fees it generates and importantly, the long duration, sticky, low-cost deposits. The deposit costs in that business went from 7 basis points to something like 15 this quarter, that’s still below our 10-year average rate of what those cost of deposits are.
So we do believe that as we get more clarity just in terms of the economy and people realize the differentiation and it should grow faster than our other deposit channels just by its general nature and again, become more of a contributor to the overall funding profile that people will start once again to recognize the power of that business, both from a funding perspective and a growth perspective.
So I think your observation is correct. I think we – obviously, we have a duty as stewards of capital in all our businesses to constantly look at the value and where are our assets and where the things we own are most valuable. We continue to be determined that it will continue to provide value to Bank shareholders, the shareholders of Webster Bank and that owning it wholly right now is absolutely the best creation of value that we could have with HSA.
Matthew Breese
Thank you. I appreciate that. Two other ones from me. The first one was just past dues, there was a bit of a pickup in commercial real estate and ABL loans. Curious what was going on there? And if there is any sort of progress towards NPA or maybe pay offs?
John Ciulla
Yes, it’s a great question and actually, I can – I always am transparent. I am frustrated that that was the case. They went up basically about $30 million in reported delinquencies. We have since the end of the year, resolved more than the increase in delinquencies. So if you looked at it, those were all administrative delinquencies, meaning we couldn’t get the documents together and get the extensions or the payoffs or the restructurings or whatever they were off the books.
They were all paying and current and at the end of the day, we’re now down to $45 million, $44 million in delinquencies. So, that entire spike was really due to administrative delinquencies that since year-end have been resolved.
Matthew Breese
Great. I appreciate that. And then the last one. On the Sponsor & Specialty and leveraged loan portfolio, I frequently go back to the first quarter of 2020, your presentation there where you laid out some really laid out some really fantastic metrics across the entire book. I was hoping for an update on a couple of them including leverage ratios, cumulative charge-offs, non-performers at this point in time and then loan-to-value ratios if you have them handy?
John Ciulla
Matt, I am going to defer that to our Investor Day. We are putting together all of our current numbers as of year-end to provide a really deep dive. What I can tell you is that you have not – we have not seen the significant risk rating migration. We have certainly not seen a material loss in that portfolio.
We have, again, our – I think to give you the answer that I can best give you right now is we’re seeing the same thing that we’ve seen in periods of uncertainty, which is, we’re in industries that seem to be more recession resilient with more predictable and contractual cash flows. That’s a general characteristic of the portfolio.
We deal with sponsors that we know and love and have spent a lot of time with and even if revenues have been challenged or even if valuations and enterprise valuations have been sort of revisited, we’re in a position where the capital structure and our position in that capital structure is such that no one is close to wanting to hand us the keys and both us and the sponsors that we work with, just make sure that we continue to evaluate opportunities and we continue to support each other going through.
So, we have not seen significant migration. We have not seen people deciding that the operating environment is too challenging and we’ve been pleased that in areas like healthcare and areas like technology and the places where we focus our Sponsor & Specialty activities, we’ve seen pretty good resiliency from the portfolio so far.
That doesn’t mean, right, that higher interest rates don’t matter on debt service, particularly if revenues are getting squeezed. So, we’re on top of the portfolio, working closely with our sponsors and you can rest assured that on March 2nd, we will update all the information and give you a really good deep dive on what that portfolio looks like as of year-end 2022.
Matthew Breese
Great. Well, I appreciate taking all my questions. Thank you very much.
Operator
[Operator Instructions] And we will take our next question, pardon me, from Casey Haire with Jefferies. Your line is open.
Casey Haire
Yes. Thanks. Good morning, everyone. Apologies if I missed this. Glenn, any thoughts on what deposit beta, cumulative deposit beta expectation is underlying this NII?
Glenn MacInnes
Yes, sure. So I did say, Casey, if you missed it, our legal – since Legal Day one, our cumulative deposit beta is 15%, and quarter over – that means quarter-over-quarter our deposit beta was 22%. We think given our rate outlook, meaning Fed funds peak at 5% and dropped by 50 basis points by the end of the year that are cumulative through-the-cycle beta will be around 25%.
I should point out that HSA to benefit that by about 5%. So the low cost long duration nature of existing deposits certainly benefits us.
Casey Haire
Excellent. Thank you. And then another follow-up on InterLINK, first off, can you disclose how much you have used since the deal closed over this month? And then two, one of the applications this – that you guys have spoken to is like, your forecast calls for Fed cuts and using this funding vehicle to build the bond book would be a very nice way to kind of increased liability sensitivity ahead of a Fed pivot. So just wondering how you’re thinking about that as an application.
Glenn MacInnes
Yes. So let me hit a few and then I’ll flip it over to John. So, first off, the betas that I gave you are on our – they exclude interLINK because we’re at the beginning of this and so there’ll be some puts and takes to that as we decide whether to leverage the optionality that interLINK provides or not. To-date, I mean, and this is – as of two weeks closed, we have about $300 million in deposits and paying off things is the first tranche paying off some of our FHLB and I talked about the pricing dynamics of that to basically just a wash from a standpoint, but it does provide us with core deposits.
And then, going forward, to your point, we do have the optionality to pay off some future FHLB borrowings or to investments in securities. So, that’s an option that we’re looking at going forward. But I don’t know if you want to…
John Ciulla
Yes. I mean, Casey, I think the last point you made, thank you for making it. I agree. I mean we were traditionally, right, you heard me in my comments, our committed desire to have more consistency in earnings given our asset sensitivity, right? And so we’ve been spending a lot of time on that. This does provide different optionality.
Yes, on its face, the cost of these deposits is Fed funds and – but obviously, in a lower interest rate environment, it does give us some opportunity to take advantages as the cost of those funds come down, and we can deploy them into securities or deploy them into loans. .
As I said in the very beginning, we looked at this and said, given the opportunity, given our position of strength and where we are and the fact that we really love our funding profile already, wouldn’t this be great to have another tool in the toolkit to deploy in various interest rate scenarios, in various asset growth scenarios, in terms of seasonality and inflows of outflows of other deposits and potential other business opportunities with the broker-dealers. So, I think your point is a very, very good one and the answer would be yes.
Casey Haire
Got it. Great. And then, just one more on the expense side of things. So, the guide, if I look at your run rate here in the fourth quarter, you are kind of in the middle point of your guide and you got that conversion coming midyear. So there could be some leverage in the back half as you recognize some of the cost saves.
Just where are we in terms of realization of those cost saves? And I guess, what can the expense run rate exit the year at in the fourth quarter?
John Ciulla
Casey, I am going to let Glenn give you the specifics. I do want to make a strategic comment on expenses. Right, I mean, obviously, what we’ve been able to do and again, we can go into more depth, obviously there are significant synergies related to this merger, some of which we have already realized, others that we still have to come, including, as you said, $30 million to $40 million related to ultimate end state after technology conversion.
We also have said and I’ve said all along in terms of managing the businesses that this allows us to invest. We’re operating at a 40% efficiency ratio. If you look at the guidance, the efficiency ratio could go have a three handle on it at some point and our goal is to operate a really robust and resilient bank that has franchise value and the ability to continue to invest in differentiated businesses and drive high ROATC and ROA and I think we’re demonstrating that.
So, just from a top-of-the-house perspective, we also look at the synergies not only to get to our lowest core run rate in expenses, but to offset our ability and to not have increase in expenses while we’re continuing to invest. Glenn talked about $25 million in commercial banking and HSA investments related to Bend, teams and some other initiatives that we’ll talk about again more at Investor Day.
We’re able to do that without increasing our efficiency ratio significantly because we continue to look at the synergies that come out of the merger. I would also comment that we’ve been very deliberate in terms of things like reducing square footage in the banking centers. I think we were one of the only MOEs not to have a bunch of the economics predicated on taking out branches.
We haven’t closed any branches since the – except for at a lease expiration, maybe a one-off or two off, but we’ve had no reduction square footage in our branch footprint. Obviously, as we’ve talked about over time, and the industry knows, there’ll be opportunities to reduce square footage. We want to make sure we get through the conversion, take care of our customers. But we have levers like that to pull as well to accelerate expense reductions over the longer term.
So, I wanted to give you just kind of my thoughts about the fact that we’re not managing quarter-by-quarter that we think we’ve got a unique opportunity to continue to invest in key businesses and that the synergies underlying that will allow us not to have significant growth in expenses where many of our peers are seeing inflationary pressures and growth in expenses.
And then over time, we do have more levers to pull should the revenue tailwinds kind of slow. We look at our branch footprint and look at other potential cost saves we have and levers to pull.
Glenn MacInnes
Yes. Casey, I would just add. Look, our core expenses on a pro forma basis, I think, are about $1.19 billion for 2022 and our guidance would suggest that we have an increase of 1% to 3%. So that’s anywhere from $12 million to $37 million.
As John indicated, whether it’s FDIC cost going up $15 million or whether it’s the investment in end, the investment in commercial business, we’re pretty much offsetting the bulk of those through vendor FTE redundancy, all tied to the merger of equals. So, we feel really good about our expense projections at this point.
Casey Haire
Great. Thank you.
John Ciulla
Thank you.
Operator
We will take our next question from Steven Alexopoulos with JPMorgan. Your line is open.
Alex Lau
Hi, good morning. This is Alex Lau on for Steve.
John Ciulla
Thanks, Alex. Say hi to Steve for us.
Alex Lau
Will do. My first question is on DDA deposits. Can you talk about your expectations for DDA deposit outflows? What are you hearing from your customers? And what do you think is considered a more normal operating level? And maybe as a reference point, pre-pandemic, you were about 20% of total deposits. This is excluding Sterling. Do you expect to go back to that level or what is a more realistic mix going forward?
John Ciulla
So I think we are running about 25% of total deposits on DDA, right? And I think on an average quarter-over-quarter basis, there wasn’t that much deterioration, a couple – maybe a couple of hundred million. On a spot basis, it was probably down, I think, about 6%. Some of that is the municipal deposits that I talked about. So you’ll see some seasonality come back into that as well.
So I think as we looked out on a full year forecast, we think it’s going to be in that range, say, 23% to 25% of total deposits, which given our deposit outlook would indicate some growth.
Alex Lau
Thank you. And then, just a follow-up question, On NIM, what are your spot loan yields as of 12/31 relative to that 525 for the average for the quarter?
Glenn MacInnes
For the quarter, our spot loan yields were – let me see, hold on just a minute, 675.
Alex Lau
Great. Thank you. Thanks for taking my question guys.
Glenn MacInnes
Yes.
John Ciulla
Hi, Alex. Thanks.
Operator
And we will take our next question from Jared Shaw with Wells Fargo Securities. Your line is open.
Jared Shaw
Hey, everybody. Thanks.
John Ciulla
Hey, Jared.
Jared Shaw
Hey. Maybe just following up on that, what’s the spot deposit cost at year-end as well?
Glenn MacInnes
78 basis points.
Jared Shaw
Okay. Thanks. And then, maybe just a little detail on the securities repositioning, how much you sold, what you sort of picked up in terms of duration, are you extending duration there and if you have AOC at the end of the year?
Glenn MacInnes
So, it was relatively small, Jared. We sold about $125 million of securities and I think the earn back on that is probably – it s less than a year and it was primarily munis sort of — and we’ve repurchased the Ginnie Mae project. So, the yield on that, so we’ve gone from like a 1.5% rate to like a 6.5%, somewhere around there on that. So, and the duration was about 3.7 years in it.
So, it was a small amount of $123 million. As we think about asset sensitivity, we’re looking more at that. We’re looking – we’ve done some collars. We’re also looking at loan swaps and stuff like that. And so there is – we think it’s probably the right time given the asset sensitivity in our view on rates that we begin to take and protect on the downside a little bit more. So, these are some of the actions that we’re taking.
Jared Shaw
Okay. That’s good. And then what’s the AOCI at the end of the year?
Glenn MacInnes
So the AOCI actually came back to us a little bit. On a capital basis, I think we had an improvement of about $57 million after tax. So it actually we went from an after-tax of 688 million to an after tax is 631. So that’s starting to accrete back into our capital. It’s kind of tied to the five years and think about it that way.
Jared Shaw
Okay. Okay. And then, just looking at loan growth in your comments that with the – more broadly on uncertain economic backdrop that’s tampering it a little bit, 6% to 8% is still pretty good. Where do you think it would be if you weren’t holding yourself back based on economic uncertainty? And I guess, where do you think that could go in a better backdrop?
John Ciulla
Yes, Jared, that’s a great question, right? And I always have a tough time answering it, because I feel like we’ve said, again, and I’ve been pretty proud of this for seven or eight years, right, that we can grow commercial loans, 8% to 10%. And we’ve done that throughout different cycles and throughout different general circumstances, loan demand, economic environments.
And we’ve also said that we’re never going to try and grow loans at all if there is no safe loans that have the right risk return characteristics or that we feel comfortable about from a risk perspective. And I think over time, we had outsized loan growth to our original forecast. There was, I think, market concern about whether or not as a bigger organization, we could generate that. And then obviously, we did, we talked about higher hold levels, being able to take better risk with higher quality credits and higher hold levels.
I think everything we talked about in getting to our 17% commercial loan growth in the year, kind of played out and came true and we were disciplined. We were going for loan growth for loan growth’s sake, where you can see areas like mortgage warehouse that are less relationship-driven, didn’t really drive loan growth, where we have loan growth, we’re getting deposits.
We’re doing it in commercial real estate, in multifamily and mixed-use industrial, right? We’re not doing office. We’re being careful about the asset classes we’re in. We’re taking care of our geographic middle market clients. We’re being careful and sponsor and we’re moving forward. So, I think the 6% to 8%, if I could make it sort of as plain as possible is probably our general assumption that it’s 8% to 10% but understanding that this is a choppier year, right.
And understanding that there may be less loan demand given economic growth characteristics and we want to be really careful. So, when you asked and said, what would it be if we weren’t in this environment, again, I think we can safely and predictably as a bank grow loans 8% to 10% year in and year out.
I think you’re seeing a little discount to that general guidance just because it would be prudent to put that out there given the economic uncertainty and concerns about risk return characteristics and quality of credit.
Jared Shaw
Great. Thank you.
John Ciulla
Thank you.
Operator
We will take our next question from Manan Gosalia with Morgan Stanley. Your line is open.
Manan Gosalia
Hey, good morning. I wanted to ask on repricing expectations on the loan book. Can you talk about how spreads are holding up in the commercial portfolios just general competitive dynamics and what runway you have for loan repricing if the Fed pauses later this quarter?
John Ciulla
Great. Are you asking more about the competitive landscape on loan spreads? Or the impact of our floating rate portfolio and asset sensitivity and what happens when rates fall?
Manan Gosalia
The former.
John Ciulla
The former. Yes. So from a competitive perspective, it’s interesting, I actually read a couple of other – our peers and big bank transcripts. I think everybody is seeing the same thing, which is there is slightly less competition just given the macro environment, the non-bank lenders that have been competing with the banks are less aggressive and active given cost of funding and other elements.
So I would say spreads that had been continuing to narrow over time during periods of high growth have kind of stabilized. So from a competitive perspective, I do feel that the regulated banking industry has a little bit more leverage in making sure they are getting paid for risk. So I think we’ve seen rates kind of stabilize to slightly expand given the credit environment.
And then obviously, the fact that we have a large floating rate book allows us in this interest rate environment to have higher yields on our loans. But the underlying credit spreads, I think, I would say, are stable to slightly improving.
Manan Gosalia
Got it. That’s helpful. And then, just a follow-up on interLINK. I think you mentioned that there are other revenue synergies you have with your broker partners. Can you talk about what those synergies are and what the timing of those synergies would be?
John Ciulla
Yes. Again, nothing is factored into our forward forecast, but we have opportunities with respect to banking services and cross-sell with the broker-dealers. We have opportunities potentially with HSA Bank and investment platforms with the BDs, securities lending activities. So, there are a number of things that we’re exploring. Nothing is in our guidance.
So it would all be kind of upside to kind of the revenue and fee guidance that we provided. And again, I think one of the focuses we’re going to have on March 2 and I hope you can be there will be a look at a number of revenue synergies coming from the merger and from some of these acquisitions like Bend and interLINK. So, we’ll provide a little bit more meat on the bone there.
But there are significant opportunities, and we’ve already engaged with our partners there in discussing some of the potential opportunities we have.
Manan Gosalia
Perfect. I look forward to it. Thank you.
Operator
And we will take our next question from Laurie Hunsicker with Compass Point. Your line is open.
Laurie Hunsicker
Hi. Thanks. Good morning.
John Ciulla
Hey, Laurie.
Laurie Hunsicker
Three unrelated questions here. Number one, just going back to interLINK. If I am looking at Slide 17, your forward guide, how much are you assuming in interLINK deposits that you actually pulled down this year in 2023?
Glenn MacInnes
So like I said, right now, we have about $300 million in the first quarter and I think you could expect $2 billion to $3 billion in the first quarter and then to grow a couple of billion each quarter. Again, that will depend on the optionality. So, I think that the highest we would assume in our outlook right there is $5 billion to $6 billion by year-end. But again, we will monitor that and have optionality .
Laurie Hunsicker
Got you. Okay. Thanks. And your drop in wealth management revenues this quarter, can you talk a little bit about how we should think about that?
Glenn MacInnes
Yes. So we announced in, I think, on the third quarter call that we had outsourced our Webster Investment Services, which is our retail platform to LPL. And so, what you see there, Laurie, is a netting of the fees with the expenses and so it’s generally around $4 million to $4.5 million reduction in fees as a result of lower expenses.
Laurie Hunsicker
Got it.
John Ciulla
So Laurie, when we own that, right, we used to recognize gross revenue and we used to recognize all expenses. The Sterling model was an outsourced where there is a net fee of those two. We did a lot of examination in terms of client satisfaction and where we are from an economic perspective and it made sense for us to adopt the legacy Sterling model.
And so now we happily report lower overall fee revenue, but significantly overall lower expenses there as well. The actual net is slightly better from an economic perspective than where we are. But that does not indicate any change in kind of the trajectory of the underlying business.
Laurie Hunsicker
Got it. Perefect. Thanks for the refresh there. And then last question, office, did you have any office sales this quarter? And then, your $21 million or so of net commercial charge-offs, how much of that if any was office? Thanks.
John Ciulla
Yes. So again, we’re – what was wonderful is our net charge-off number on an annualized basis is kind of consistent with our pre-pandemic four year running average rate and in that, to your point, there are some – as I mentioned on an earlier question, there were a couple of proactive note sales that contributed. So we had in our consumer business, we had net neutral to net recovery.
All the charge-offs were basically driven by four or five commercial credits, two or three of which Laurie were office related. Aggregating somewhere in the $10 million range and two of those three office credits were proactive note sales. And so, that’s about as granular as I’ll get there. And again, I think we feel pretty good about the way we’re proactively managing that book within and the sort of ultimate results from some of the asset sales we’ve gotten there are going to benefit us going forward.
Laurie Hunsicker
Great. Thanks for taking my questions.
John Ciulla
You got it. Have a great day.
Operator
And we will take our next question from Jon Arfstrom with RBC Capital Markets. Your line is open.
Jon Arfstrom
Hey, good morning, everyone. Thanks for hanging on till the end.
John Ciulla
Of course.
Jon Arfstrom
Yes, just a few cleanups. Glenn, anything else to call out on the fee expectations guidance. Anything new there? Is it just a simple as pull out the losses and continue the path that you had in the fourth quarter?
Glenn MacInnes
On the fee income line?
Jon Arfstrom
Yes, fee income line and the fee income guidance.
Glenn MacInnes
Yes, so the guidance of $415 million to $430 million we always talk about looking at.
Jon Arfstrom
Exactly.
Glenn MacInnes
No. I mean, I think we just talked about part of that is part of a decline year-over-year. $25 million or whatever is – about half of that is the netting of the consumer investment platform. We don’t think that will get the swap income that we got last year, obviously, because of higher rates. And then, we did – we have factored in lower deposit fees due to consumer behavior, industry pricing and things like on HSA.
Jon Arfstrom
Okay. Good. Fair enough.
Glenn MacInnes
I am sorry, on a GAAP basis, for fourth quarter, obviously, you have that securities loss of $4.5 million as well. So, that will be, as we review the securities portfolio, we’ll spike that out, obviously. But if we take more actions, that could influence that number on a GAAP basis.
Jon Arfstrom
Okay. Good. And then, on interLINK, is there a size limit you are thinking about in terms of deposits on your balance sheet? And do you plan to report it separately like you’re doing on Slide 5?
John Ciulla
Yes. we’ll absolutely provide that. Again, the great thing about it is accordion feature where there is an automatic distribution valve in terms of whether we need the liquidity and it’s optimal for us. I think just like we had the questions over years around HSA, what’s the right number? We always got questions about whether the regulators care that HSA was becoming 20% to 25% of our deposits.
I think we’ll use the same prudent risk management and we have so many different deposit channels when you think about retail, commercial, small business, BRIO Direct, which is our direct channel, HSA Bank and now interLINK that I think will just be prudent to make sure that there is not too much of a concentration.
But if you look at what Glenn just said about what we mentioned earlier, the opportunity, even if $9 billion or $10 billion could be available to us, it doesn’t really represent a concentration going given the overall core funding deposit profile. So, I think it’s going to be less about us sending an artificial limit and more about do we have used an opportunity to deploy those deposits.
Glenn MacInnes
Yes. And John, we have about $5.5 billion in FHLB funding at quarter end and we are basically at 438 and so the pricing is pretty much very similar to InterLINK. And so, if you think about on that perspective you can pay a bulk of that down and gain the core deposits at the same time, right? And then, you have further optionality, whether it’s the securities portfolio or things like that.
So it provides a significant amount of optionality for us. We don’t have to take – I think I answered 1 of the questions say we could have up to $5 billion or somewhere around there by year-end. But that’s an option for us, right?
Jon Arfstrom
Okay. That’s a good slide, Slide 5. I like that.
John Ciulla
We’ll keep it in, Jon.
Jon Arfstrom
Okay. Great. And then, on expenses, you may not answer this, you may have answered it already, but you mentioned some expenses on expanding commercial activities. And is that what you talked about sharing on Investor Day? Is there something more that you can talk about now in terms of that?
John Ciulla
Yes. I mean, there is nothing hidden, right? It’s new verticals, it’s hiring teams and people. There are a couple of new potential business initiatives that we’re viewing right now. So it’s what you’d expect and what you’ve actually quite frankly, seen Webster entirely and both of the legacy organizations that form this new bank do over time, which is to continue to take advantage of opportunities in areas where we can get full relationships with deposits, capital markets fees, cash management and look at geographies, asset classes and verticals and invest in those.
And I think I’d like to say that we’ve done it with success over time and I think we will share more at Investor Day, but it’s not a top secret. It’s about building out and kind of replicating what we’ve done in the past with respect to expanding activities.
Jon Arfstrom
Yes. Okay. All right. Thank you for everything.
Glenn MacInnes
Thanks. Jon.
John Ciulla
Thank you.
Operator
And with no further questions, I will now turn the call back to Mr. John Ciulla for closing remarks. Thank you very much. Really appreciate everybody joining us for this great discussion this morning and thank you for your continued interest in Webster. Have a great day.
Operator
And ladies and gentlemen, this concludes today’s call. We thank you for your participation. You may now disconnect.
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