Webster Financial Corp

NYSE:WBS

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, and welcome to the Webster Financial Corporation and Sterling Bancorp Merger and First Quarter 2021 Earnings Call. Please note this event is being recorded.

I would now like to introduce Webster's Director of Investor Relations, Kristen Manginelli, to introduce the call. Ms. Manginelli, please go ahead.

[Kristen Manginelli, Director, IR]

Thank you, Melissa. Good morning and welcome. Earlier this morning, we issued a joint press release to announce a merger of equals, of Webster Financial Corporation and Sterling Bancorp. Both companies also separately issued their respective first quarter earnings releases. On the call today, we will discuss the merger announcement and provide some brief comments regarding each company's first quarter earnings. As noted in our earnings releases, this call will take the place of the earnings calls previously scheduled, and those calls have been cancelled. Today's presentation slides have been posted on each company's Investor Relations Web site.

Before we begin our remarks, I want to remind you that the comments made by management teams of both Webster Financial Corporation and Sterling Bancorp may include forward-looking statements within meaning of the Private Securities Litigation Reform Act of 1995, and are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us.

I'll now introduce Webster's Chairman and CEO, John Ciulla.

[John Ciulla, Chairman and CEO]

Thank you, Kristen, and good morning. We appreciate everyone joining us this morning to talk about this terrific transaction. With me here in Stamford are Jack Kopnisky, President and CEO of Sterling; Luis Massiani, Chief Operating Officer of Sterling; Glenn MacInnes, Webster's CFO; and Bea Ordonez, CFO of Sterling. Jack and I will walk you through the merger transaction. Glenn and Bea will then briefly discuss each bank's first quarter earnings, materials for which were released earlier this morning. At the end of our joint presentation, the five of us will be happy to take your questions.

Jack and I are so excited about bringing together two great banking organizations. We believe that we're creating a banking powerhouse. A differentiated, commercially focused, high-performing franchise, with strong middle market and retail market share from metro New York to metro Boston, and established and growing national health savings and commercial banking businesses.

With that, let me turn it over to Jack.

[Jack Kopnisky, President and CEO, Sterling]

Thanks, John, and good morning to everyone. We are very excited to announce this terrific combination. John and I have been talking for several years about creating this type of transformative combination. We strongly believe the combined company will create strong shareholder returns, terrific value propositions for our clients, provide an exceptional work experience for our colleagues, and support and serve our communities. We also think that scale matters. The scale to invest in top talent, scale to provide technology solutions our clients and employees want and need, scale to invest to create a best-in-class enterprise risk management system, and importantly, significant investments in businesses where we can continue to distinguish ourselves.

Let's start our presentation on page five of the deck, to detail the attributes of the transaction and resulting combined company. This combination drives scale and diversification, and unlocks significant revenue growth opportunities across commercial lending, health savings, consumer banking, and fee-based businesses. The pro forma financial metrics of the combined company are strong. EPS accretion is significant to both sets of shareholders, at over 20% to Webster, and over 10% to Sterling. The projected ROA TCE and ROAAs are top quartile, and we expect to achieve those returns while investing in our differentiated businesses. The combined company is expected to generate significant excess capital, which we intend to allocate diligently, we estimate well over $400 million generated annually through core earnings.

Finally, John and I are very aligned and passionate about the culture of the combined company. In building this company, we will take the best of both predecessors. Through out discussions and due diligence, we found the companies to be extremely complimentary from a business standpoint and from a culture standpoint. We're focused on using the elements of both companies' business attributes and cultures to build a distinctive, results-oriented, contemporary organization that cares about each employee, and provides a terrific client experience.

On page six, we outline why we think this is a powerhouse North-East bank. First, we enjoy complementary regional presence in the largest concentration of commercial and consumer households and wealth in the United States, from Boston to metro New York City. Our combined 200 financial centers serve consumers and small businesses along the I-95 corridor and Long Island. Secondly, we each have strong high-performing northeast region relationship-based segment-focused C&I and CRE middle market and business banking teams. Third, this combination brings complimentary national middle market-focused commercial teams in HSA, sponsor finance, lender finance, equipment, public finance, mortgage warehouse lending, innovation finance, ABL, factory, payroll finance, franchise lending, community development, and national CRE. We have significant diversity in asset categories where we can allocate capital to achieve our targeted risk-adjusted returns.

Fourth, we will have a superior low-cost long-term funding diversity and liquidity through financial centers, commercial teams, health savings, online, and banking as a service channels. The HSA channel is particularly unique and opportunistic. The funding attributes of these combined companies are among the best in the industry. Fifth, the earning power of the combined company provides for significant flexibility in how we invest for the future. We are aligned in our strategy for how we will use this power to deliver meaningful returns, and create a forward-looking organization. Finally, we are confident in our ability to deliver this proposition. We have talented leadership teams and team members with extensive regional, industry, and transaction experience, with a proven history of performance and execution. Our most important attribute of this combined company will be our highly talented colleagues and team members.

Now, let me turn this over to John to provide the specific details of the transaction and our future together.

[John Ciulla, Chairman and CEO]

Thanks, Jack. The transaction is really compelling, obviously, from a strategic perspective. Both banks have a decidedly commercial banking focus, and our businesses are really complimentary, as Jack highlighted. Both organizations have a strong regional presence in the attractive New York to Boston market, along with differentiated and profitable commercial banking businesses with proven execution from both a growth and a credit quality perspective. The larger scale and revenue base will allow us to more aggressively invest in key businesses and activities, including HSA Bank.

This transaction will enable us to enhance our HSA Bank proprietary technology and product offerings. And we believe we can maximize the value of that business by leveraging the scale and investment capacity of the larger organization. And the combined entity will continue to build out digital and banking as a service capabilities, building on the recent successes on the Sterling side, as well as focusing on growing fee generating businesses in treasury services, capital markets, and beyond. The retail footprints are contiguous, and we connect Webster's Boston to Southern Connecticut Westchester banking center footprint with Sterling's robust metro New York and Long Island footprint.

Turning to page eight, as I mentioned, both banks have purposefully focused on commercial banking growth. And the combined organization will have a complimentary and diversified loan portfolio with respect to both geography and asset class. For example, Sterling has a higher concentration in CRE, while Webster has a higher concentration in sponsor and specialty lending. When you bring the two banks together, concentrations are reduced. Importantly, lending capacity is created, and opportunities to bank a broader customer base are created.

And as I mentioned earlier, we have a great New York to Boston regional commercial banking business, representing about 75% of the commercial businesses, along with several niche national lending businesses, that Jack discussed, with proven track records on growth, profitability, and asset quality. Consistent with prior transactions like this, we don't include any revenue synergies in our financial model. However, Jack and I believe there is significant top line upside for this combined company, and is one of the primary motivations for both of us in pursuing the combination. I'll provide one specific example.

In Webster's Sponsor and Specialty Business, we have been very disciplined with respect to single-credit hold levels. We often step away from great lending opportunities with long-time relationships given balance sheet constraints as a $30 billion bank; constraints that are largely eliminated when you are a $65 billion bank. The result will be stronger prudently underwritten loan growth along with increased treasury and capital market fees.

Turning to page nine, we coupled our commercial lending franchise with the best-in-class and diversified deposit franchise, a deposit franchise that will be even more differentiating as interest rates rise over time. Four driving segments: A consumer banking franchise with a branch footprint in one of the most important and attractive markets in the country, a commercial banking franchise that offers sophisticated treasury management services for commercial customers, a top health savings franchise nationally with 3 million customers, 10 billion in footings, a 12% market share and 11% realized account growth over the last five years, and lastly but just as importantly, a growing digital banking platform and high potential banking-as-a-service business.

On page 10, Jack and I both know the key to success and execution here is bringing these two great organizations together from a people and culture perspective. We have a clear and aligned view on what the combine organization will look like and what we will expect from our colleagues and bankers. The combine company will be simply a great place to work. We will strive to create a culture of high accountability that is entrepreneurial and change ready rewarding high performance, execution, and teamwork. We will have a culture that is diverse, equitable, and inclusive where all bankers will respect the dignity, ideas, and perspectives of their colleagues, clients, and members of the communities we serve. We will combine our strong risk cultures where every banker is a risk manager who embraces and understands the bank's risk appetite and who owns the risks inherent in her or his activities. At the core of our culture will be our values where we will expect all bankers to have high integrity and to do the right thing all the time even when no one is looking.

I would like to jump to page 12. Having addressed the strong strategic position of the combined company, let me turn to the structure of the deal, this is a 100% stock merger of equals. Sterling shareholders will receive a fixed exchange ratio of 0.463 a share of Webster for each share they own in Sterling. Sterling Bancorp will merger into Webster Financial Corporation. And the resulting holding company will be Webster Financial Corporation. Sterling National Bank will merge into Webster Bank and the resulting bank will be Webster Bank. Leadership will draw from both companies. Jack will be executive chairman for 24 months from closing. I will be president and CEO at closing and will further become chairman after 24 months. Luis will be our COO and Glenn will be our CFO. As Jack mentioned, the rest of our executive team will be made of talented and diverse professionals from both organizations.

One thing I can tell you is that we do not have a shortage of talent to draw from. Our board will be comprised of eight existing Webster directors and seven existing Sterling directors. Bill Atwell, Webster's existing Lead Independent Director will continue to serve in that capacity through the combined company for 24 months post closing when the Lead Independent Director will become a heritage Sterling director.

Pro forma for the transaction, Webster's existing shareholders will own approximately 50.4% of the company and Sterling shareholders approximately 49.6%. Our shared head quarters will be here in Stamford, Connecticut. We are strongly committed to our community and will retain a strong presence in Waterbury, Connecticut and in several metro New York locations. Both banks have strong relationships with our regulators. And we expect to close the deal in the fourth quarter of this year.

On page 13, I'll briefly go through the key financial assumptions and underpinning those financial benefits of the combination. First, the two companies have utilized analyst consensus estimates for 2022 as a baseline. On cost, we've identified net cost savings of $120 million pre-tax net of identified technology and people investments. Cost saves are equal to approximately 11% of our 2022 combined expenses and is incremental to Webster's announced efficiency initiatives. We expect to phase in 75% of the cost saves in 2022 and all of them by 2023.

On revenues, as discussed earlier in the presentation, we have identified a number of opportunities to enhance our franchise through the combination, but we have not factored in those potential synergies into our financial model. Given the exceptional profitability and strong capitalization of the pro forma company, we have assumed that we will return a portion of our $400 million plus in excess capital generation to shareholders in the form of repurchases, $400 million of share repurchases are assumed in 2022, and for modeling purposes we're assuming a 75% payout ratio thereafter. This adds approximately 200 basis points to the earnings per share accretion to our shareholders. But I want to stress importantly, that we can meet the EPS accretion figures we've disclosed without buying back any shares. Lastly, we've included here for you to see the credit and fair value marks we expect to take at closing, when Sterling's balance sheet is marked. We perform significant reciprocal credit diligence and affirm the adequacy and appropriateness of both companies existing allowance for credit losses.

The output of our combination is on page 14 and in a word it's exceptional. The deal is more than 20% accretive to Webster shareholders, more than 10% accretive to Sterling shareholders, we can get to those with the cost saves fully phased in and we have enhanced our ability to invest in the franchise. Tangible book value dilution and earn back are minimal and not material. We'll produce approximately $440 million per year in excess capital. As I said before, we'll invest aggressively in our business and support loan growth, while still having significant capital to return to shareholders. Jack and I are completely aligned on capital management.

Turning to slide 15, I'm incredibly excited about what this deal means for HSA Bank. As you know, a top priority at Webster has been to aggressively grow HAS and part of the strategic rationale for both sides for doing this transaction is what we can do to accelerate that growth. As Webster's analysts and shareholders already know HSA Bank is a growth engine delivering account growth of 11% over the past five years. Pairing HSA Bank with a combined entity strong banking businesses maximizes its economic profits potential relative to its standalone non-bank peers, meaning we can realize the full value of the deposits as a bank. This deal makes HSA Bank better and over time bigger. First, we'll have two times the balance sheet to grow the business. Second, we'll have larger product and technology investment budgets and third we'll continue to benefit from the long-term growth and Health Savings driven in part by favorable demographics, and a strong market position.

Let me spend just a couple of moments on the cost savings and investment opportunities outlined on page 16. As I said previously, we've identified $120 million in cost saves. That's net of investments. We identify these using a bottoms-up approach, with the two teams working together to identify facilities optimization opportunities, redundant technology, overlapping servicing platforms, shared services, third-party and vendor consolidation opportunities, and the like. You'll note that the saves don't come from revenue generating resources and our branch overlap is low, which should limit the impact on our customers and our communities. I can't emphasize enough that both Jack and I view the cost saves that enabling us to create investment capacity to grow our differentiated businesses.

The combined company enters this transaction with a robust starting capital position and an industry leading pro forma profitability that you can see on page 17. Fully synergized earnings net of organic growth and our common dividend produced $440 million of excess capital annually equivalent to $2.50 a share.

On page 18, we show a little bit about the diligence process, Jack and I would really like to thank our 200 plus team members across both organizations who participated in our extensive due diligence effort. Both companies diligenced each other extensively with a particular focus on loan portfolios, where we sampled and reviewed significant portions of each other's largest exposures, commercial and real estate portfolios and COVID impacted sectors. And more importantly, for the combined company going forward, this diligence process revealed that we have a common approach to enterprise and credit risk management. And there are talented teams across both organizations that are excited to get to work together.

Let me conclude on page 19. As you can see from the metrics and hearing our voices, we're very excited about this combination. Webster and Sterling are individually strong performers and together we're simply best in class. As outlined here, the strong value we're unlocking for our shareholders and we think there is tangible and material upside as we deliver.

With that, let me hand it back to Jack for some comments.

[Jack Kopnisky, President and CEO, Sterling]

Thanks, John. And as John and I have outlined, we absolutely positively believe this is a winning combination. The combination enables us to achieve the scale fully invest in our people, technology, risk systems and targeted businesses to achieve strong returns and results. The financial outcomes of the transaction are strong with solid EPS accretion for both shareholder basis, strong tangible book value earned back, or short intangible book value earned back, strong projected returns, and capital generation through earnings. The complimentary nature of both companies businesses and cultures will be reflected in the combined entity as John said. We are very excited about the future together. We're very confident we will deliver a great value proposition for our shareholders, clients, colleagues, and our communities.

Now, let me turn the call over to Glenn MacInnes. Webster's CFO, who will take you through Webster's earnings for the quarter, and we'll then turn it over to the call to Bea Ordonez, who will review Sterling's first quarter results and then we will open it up for questions from all of you. Thanks.

[Glenn MacInnes, CFO]

Thank you, Jack. I will provide brief comments on our first quarter results, which were released this morning. Webster reported solid first quarter earnings reflective of further improving credit trends, increase liquidity and lower funding costs.

Our reported net income of $106 million or $1.17 per share is up from $0.64 per share in the prior quarter. Excluding $7 million of after-tax expense related to our strategic initiatives, net income was $112 million or $1.25 per share resulting in a 14.6 return on average common equity and a 17.9% return on tangible common equity.

Tangible book value grew 1.3% linked quarter and 7.4% from prior year. Adjusted net interest income grew by $3 million linked quarter largely driven by PPP fee accretion. The quarter included $7 million of incremental quarter-over-quarter PPP deferred fees and lower funding costs. This was partially offset by two fewer calendar days and a lower yield on interest earning assets.

Adjusted NIM improved by four basis points linked quarter to 2.92%, as the net result of lower funding costs and PPP fee accretion partially offset by excess liquidity and lower earning asset yields. Non-interest income was flat quarter-over-quarter, primarily as a result of higher HSA fee income offset by lower mortgage banking volume. While loan balances declined modestly in a quarter originations, excluding PPP loans totaled $1.3 billion and increased $100 million from prior year.

During the quarter forgiveness on PPP loans totaled $470 million, which was more than offset by $533 million in new PPP originations. Adjusted expenses declined $2.5 million from prior quarter, as we begin to realize benefits from our strategic initiatives. To date, we have completed two-thirds of our plan to consolidate 26 banking centers with the remainder closing by the end of Q2.

In addition, we implemented several organizational changes to drive efficiency and growth. These changes include the realignment of business banking clients with annual revenue above $2 million, and the consolidation of our wealth offering into the commercial bank. These changes will make Webster more competitive in the marketplace by simplifying processes and increasing efficiencies to better serve our customers and bring more value to our shareholders.

We have made significant progress on our expense initiatives and remain committed to meeting our stated goal of 8% to 10% reduction in run rate expenses by Q4. Credit quality trends continue to be favorable as highlighted by linked quarter declines in non-performing loans, commercial classified loans and net charge offs.

In the quarter, we reported a $26 million credit to provision and a $31 million reduction in the allowance. This was a result of favorable credit trends and improved economic environment and to a lesser extent lower quarter-over-quarter loan balances versus prior year adjusted net income increased $76 million reflective of $102 million reduction in loan loss provision, a $4 million decline in revenue.

With respect to the balance sheet, average loans declined $250 million or 1% from Q4 in line with industry trends. Average deposits grew $1 billion from Q4 or 4% led by $438 million in HSA.

In the quarter, HSA Bank opened 264,000 new accounts and cross the 10 billion mark in total footings. Also in line with industry trends, we've experienced a significant inflow of liquidity and our average excess liquidity was $680 million for the quarter. Regulatory capital remained strong and exceeded well-capitalized levels by substantial amounts.

With that, I'll turn it over to Bea for review of Q1 results for Sterling.

[Bea Ordonez, CFO, Sterling]

Thank you, Glenn, and good morning, everyone. I'm going to provide a brief overview of our first quarter earnings results, which released earlier this morning. Please note that the press release we distributed provides additional details that I will not cover on this call. We reported adjusted EPS, $0.51, up from $0.49 in the fourth quarter. On an adjusted basis, this reflects a return on average tangible assets of 1.42%, and a return on average tangible common equity of 14.6%. We grew tangible book value per share to $14.08, from $13.87 at the end of the fourth quarter. Our revenues held up well in what tends to be a seasonally challenging quarter, and our lower provision for credit losses helped drive the EPS improvement quarter-over-quarter.

Our pre-provision net revenue on an adjusted basis was $124 million, down $6 million relative to the prior quarter, largely driven by day count and a decrease in fees from loan sales. Our core NIM improved nicely to 3.3%, from 3.25%, with the loan yields stabilizing in some key verticals, and consistent progress on driving down overall deposit costs, which declined seven basis points over the linked quarter. The income was down slightly versus Q4, which included $3.7 million of fees related to PPP loan sales. But we did see encouraging trends across a number of categories, including treasury management, factoring, payroll, and in our customer derivatives business. Our adjusted non-interest expenses were effectively flat, at $110 million, despite a few items unique to the first quarter including higher payroll taxes and seasonal compensation and benefits expenses.

On the balance sheet, deposit growth was solid, with both total and core deposits up over 3% relative to the linked quarter. Loan balances were impacted by a $559 million decline in mortgage warehouse loans, and by the sale of PPP loans. Excluding the impact of these items, loan balances were flat in what is typically a slower quarter in terms of originations. Positively, we did see growth in the commercial real estate and public sector finance portfolios. We have a strong pipeline of business and expect to see a stronger second quarter and back-half of the year in terms of loan originations.

Touching briefly on credit, provision was $10 million, down from $28 million last quarter. And we had net charge-offs of $13 million. Our NPAs were flat, at $174 million, and loans on deferral declined to 0.06 of a percent of total loans. Our ACL to total loans was effectively flat, at 153 basis points. While the macro outlook in our seasonal model did improve modestly, we continue to maintain a conservative approach to reserve releases, as the New York metro area continues its path towards fully reopening. Finally, in terms of our capital position, we continue to generate and carry robust levels of capital, with our TCE ratio increasing eight basis points in the quarter, to 9.63%, and our Tier 1 and leverage ratios gaining over 50 basis points over the same period. Finally, we repurchased 1.2 million shares of common stock in the quarter.

With that, I will turn it over to Luis.

[Luis Massiani, COO, Sterling]

Thanks, Glenn and Bea for that review of first quarter results. That is the end of our prepared remarks. Jack, Bea, and I are excited to be here, with John and Glenn, announcing this merger today, and want to thank everyone again for joining us. We think this is a great opportunity for both organizations.

Now, let's open the line for Q&A.

[Operator]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chris McGratty with KBW. Please proceed with your question.

[Chris McGratty, KBW]

Hey, good morning, everybody.

[John Ciulla, Chairman and CEO]

Hey, Chris.

[Jack Kopnisky, President and CEO, Sterling]

Good morning.

[Chris McGratty, KBW]

Maybe let's start with a question about growth pro forma. I mean with the Sterling Astoria deal there was an ongoing remix that occurred over a couple years. Doesn't seem like that at all is kind of part of this transaction. I'm interested kind of in how you're thinking about the combined growth rate, especially with one of your larger peers having sold recently? Thanks.

[John Ciulla, Chairman and CEO]

Yes, Chris, it's a great question. I would say two things. As I've said over and over again, with our commercial book and then the work we've done with Jack, we both think that in a normalized loan demand environment, we're a high single-digit 10% loan growth company on an organic basis. We don't see a lot of repositioning here. Obviously, we caution giving growth estimates right now just because of what's going on economically in terms of demand, and what's going on in some of our metro markets. But the reality is one of the reasons we get so excited about this is that we think we can grow commercial loans high single digits 10% annually on an organic basis. And if you heard Jack describe, all of the different business lines and levers we have to pull, we don't have to throw the bomb in any one asset category or any one geography. And we don't see ourselves necessarily pulling back or repurposing any of the commercial portfolios. So, we've got this great geographic diversity, this great asset class and business diversity. And we think when we get to some economic tailwinds we'll be able to outperform the market with respect to loan growth.

[Jack Kopnisky, President and CEO, Sterling]

Yes, and your observation is right, Chris, that in the Astoria thing, we were -- we really needed to reposition the balance sheet to get the types of mixes that we want. And this, as John described, this is all kind of growth opportunity in the diversity of categories we have. One of the great things about this mix is the businesses that we have especially on the commercial side are complimentary, they're not conflicting, and they have the right kind of concentration levels when you add everything together as they sit. So, John used this really great example of the sponsor business, of being able to grow that sponsor business very much so now that with the combined balance sheet. On our side, we have been limited by the size of the deals that we've been able to do because of the balance sheet. So, now we have great opportunity to grow a variety of categories, and keep within the risk parameters that we want to stay within.

[Glenn MacInnes, CFO]

Hey, Chris, it's Glenn. Let me just add one more thing to that. In the model itself, we sort of modeled it along the lines of consensus estimates, so around 4%. So as both Jack and John had indicated, we think we're being conservative when we have opportunity to grow above that level, so just for modeling purposes.

[Chris McGratty, KBW]

No, that's helpful. If I could just sneak one more in, a lot of discussion today with interest rates and potential, over time, to see rates move up, I'm wondering how this combination affects the overall rate profile of the company. And, obviously, Webster has got the HSA business, and I see that roughly 60% of the book floats. But how are you thinking about just rate positioning pro forma?

[Glenn MacInnes, CFO]

Yes, so let me take that, and anyone can add to it. But I think from a combined standpoint, we think we're very well positioned for rising rates. And as indicated on the slide, our loan portfolio, 80% of which is commercial, and 60% of that which is floating and adjustable. So, we think we're very well positioned right now for the eventual rise in rates.

[John Ciulla, Chairman and CEO]

And the combination is super complementary from the perspective of allowing us to kind of originate all types of assets across that interest rate spectrum. So, with our commercial real estate exposures and the business lines that we're in, we have the ability to originate assets on the five, seven, 10-year part of the curve. And that combination of being able to add some fixed rate assets longer-term at slightly higher yields better positions the company for any type of interest rate scenario, regardless of what happens to the interest rate curve. So, very complimentary, but the company itself is extremely well-positioned for a rising rate environment, a steeper curve, as well as a rising rate environment which would be very, very beneficial to both companies, and on combined basis.

[Chris McGratty, KBW]

Great, thanks a lot.

[John Ciulla, Chairman and CEO]

Thanks, Chris.

[Operator]

Thank you. Our next question comes from the line of David Chiaverini with Wedbush Securities. Please proceed with your question.

[David Chiaverini, Wedbush Securities]

Hi, thanks. Just wanted to ask as a follow-up to that growth question, you kind of emphasize high single-digit 10% for the commercial portfolio. And you mentioned, for modeling purposes, 4% combined. Should we read into that that the consumer portfolio could be a drag on that growth. And so, growth as opposed to high single-digit 10% would be more, say, mid to high?

[John Ciulla, Chairman and CEO]

No, let me be clear. I talked about, over the long-term, in a normalized loan demand market getting that kind of growth. What you'll see in the model, as Glenn talked about, is taking into consideration us coming out of the pandemic and current loan growth estimates. So that the consumer portfolio, which really going forward would be basically the mortgage and home equity book at Webster, with what's remaining of mortgage book at Sterling, will really not impact. It probably won't grow as quickly, but it won't, because the commercial bank portfolio will be so strong, that should not mute overall loan growth. But I want to be clear about the 4% in the model takes into consideration off of consensus estimates, and takes into consideration the current economic environment. What I'm providing is a perspective on what Jack's bank and what our bank had been able to do over the longer-term with respect to organic commercial growth in a more normalized economic environment.

[Jack Kopnisky, President and CEO, Sterling]

And remember, that the loan mix is 80% commercial, 20% consumer. So, the math kind of works, as John described.

[David Chiaverini, Wedbush Securities]

Great, that's helpful. And in terms of the scale benefits that you spoke about, it sounds as if you've been turning away some good opportunities just for risk management purposes. It sounds as if that's yet another reason as to how you're going to be able to achieve this high single-digit 10% loan growth going forward.

[Jack Kopnisky, President and CEO, Sterling]

Absolutely. I mean across all the businesses we have better opportunities. And also things like syndicating larger deals. So with Sterling, at least on our end, we haven't done big deals we syndicate out, because we wanted to take a bigger exposure. This company will be more capital markets oriented than either company was previously. So, there are a variety of opportunities. And what we feel really comfortable about is we have not weighed in on the models on the incremental revenue synergies as a result of this company, those types of opportunities to expand the size of deals out there, the opportunity to grow from a banking as a service standpoint, the opportunity to grow the HSA business more significantly than already great growth. So, we haven't really modeled -- well, we have modeled it, but we haven't modeled into the estimates of this. We think the revenue opportunities are significant, but you see the financials as they are even without the revenue synergies.

[David Chiaverini, Wedbush Securities]

Great. And then last one for me is on HSA. The growth seemed to be a little bit better than what I was expecting. Can you talk about the pipeline and the outlook for HSA here?

[John Ciulla, Chairman and CEO]

Yes, I mean it's been an interesting time for us because there's been a whole lot of dynamics around the HSA business that had been impacted by the pandemic. We obviously saw lower swipe fees and interchange fees because people weren't going to the doctor. We also saw not quite as much activity in terms of new accounts opened by existing customers. And that wasn't unique to us, everyone in the marketplace, because of the employment dynamics, saw lower organic account growth from their existing customers. So, we sort of -- we were relatively pleased with what we were able to do, particularly in this enrollment season, in terms of winning new business and customers, because we know that, but for the passage of time, a majority of our new accounts come from existing customers.

So, the key thing for us is to continue to add corporate and large employee customers. We believe that as the pandemic settles, that we'll see more normalized account growth from our existing customers, that there'll be more activity in the marketplace, and that we'll see more fee income from interchange, and from other sources and account fees as we grow the business. So, I think the good news for us, and you didn't ask this question but I'll offer it up, is that any concerns around what was going on legislatively or with the new administration we think are completely allayed. So, I think there, we feel like there's bipartisan support for health savings accounts as a solution to help lower overall health costs, and to empower people to take care of and take control of their own healthcare. And so, we see nothing but the demographics increasing growth opportunity in that business. And as we said a couple of times, both Jack and I, one of the really important reasons for doing this transaction is to free up investment capacity so we can either -- even accelerate that growth into a good environment there.

[David Chiaverini, Wedbush Securities]

Thanks very much.

[John Ciulla, Chairman and CEO]

Thank you for the question.

[Operator]

Thank you. Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Please proceed with your question.

[Jared Shaw, Wells Fargo Securities]

Hey, good morning, everybody.

[John Ciulla, Chairman and CEO]

Good morning.

[Jack Kopnisky, President and CEO, Sterling]

Hey, Jared.

[Jared Shaw, Wells Fargo Securities]

I guess just sticking with HSA, looking at slide 15 in your commentary. Were you -- is that implying that the legacy Webster balance sheet was limiting HSA growth, or is it more that going forward, you won't have to worry about you know, maybe concentration risk as much.

[John Ciulla, Chairman and CEO]

I think here it is more opportunistically, so I don't -- we felt we've been competing well, we've held onto our market share and our position in the market even as some of the other competitors have grown inorganically, but we knew that this was an opportunity to supercharge the growth there and the investment make sure that we're giving our customers the right proprietary technology experience. Making sure that we have the right people, making sure we can opportunistically invest in complimentary product lines there. And so I wouldn't say we were frustrated, because we continue to grow organically at a rate that allows us to maintain our market share, but we think this could be differentiating and an inflection point for us to really accelerate that growth, vis-à-vis our competitors.

[Jared Shaw, Wells Fargo Securities]

Okay, all right. And I guess maybe shifting a little bit to the technology side, can you talk a little bit about the two technology platforms, core platforms and some of the other tech offerings and where there's compatibility and maybe where there's some opportunity for upgrading. And then, I guess, how is the Sterling thinking as a service offering, tying into that and into the legacy Webster products?

[Jack Kopnisky, President and CEO, Sterling]

Sure. So, a couple of different questions there I think so. First and foremost from a synergies or savings perspective we think that there's a tremendous opportunity on the IT side. So we're going to go through a, as we do with every merger that we have done, we're going to go through a detailed review of pros and cons of what store runs today, what we run today. And we're going to figure out what's the best combined platform for the company of this size and diversity that we're going to be that applies both on the deposit side. It applies on the lending side, the combined company runs up something like 16 different lending platforms today; most of those being with the diversified product offerings on the short-term working capital financing that Sterling does.

And so, across the board, when you think about the ability to generate efficiencies and savings, it is two-fold. It's both in the deposit and on the loan side. And again, after a detailed review of what's best for the combined company, it's going to be pretty clear as to how that -- kind of how that, where what the best solution is going to be. From a banking as a service perspective, I think that that is more, the way that we have the combined thought process there is that it's not so much a, how does that benefit a Webster shareholder or Webster customer, but how does that benefit the combined company customer right? So there's going to be the ability to provide specific types of new products, deposit and lending to small businesses, to consumers, to small and middle market commercial that are going to be driven through more of a digital insect enabled platform than what either company has done historically.

You'll see that in our first -- in the Sterling first quarter release. We highlighted there that we have three new banking as a service initiatives with Google, Bright Fi and Rho Technologies. The benefits of those relationships are going to start being, you will start seeing them in the second quarter results with increased deposit balances and increased fee-based opportunities and all three of those relationships. And so, the ability to build a diversified platform of fintech partnerships across the board benefits both companies and at the same time, and it creates a new angle from the perspective of deposit gathering, asset generation, as well as fee-based origination for the combined company.

[Jared Shaw, Wells Fargo Securities]

Good. Thank you.

[Jack Kopnisky, President and CEO, Sterling]

Welcome.

[Operator]

Thank you. Our next question comes from the line of Christopher Keith with D.A. Davidson. Please proceed with your question.

[Christopher Keith, D.A. Davidson]

Good morning, everyone.

[John Ciulla, Chairman and CEO]

Good morning.

[Glenn MacInnes, CFO]

Good morning.

[Christopher Keith, D.A. Davidson]

So I guess I'd like to start with, could you provide some color on the potential cross-selling opportunities between the two firms?

[Glenn MacInnes, CFO]

Yes, I mean, I'll start, they're significant across the commercial banking businesses across, just deeper penetrating our entire consumer footprint. And then as we talked about, we've begun to explore in earnest cross selling to our HSA account holders on a national basis, too. And so I think when you put a company of this scale together, and you think about some of the digital offerings that Luis was talking about, and you think about banking as a service, there are all kinds of opportunities to segment people that touch this combined organization and figure out how to provide financial solutions for them on a broad scale. So, some are obvious. And again, I'll speak with the ones that pop into my mind. And I apologize if they're Webster centric, but one of the things in cross selling HSA to large employers, BFA is in that business for example, and they have large corporate customers.

Now again, with a bigger balance sheet, we can move up market and play in credit facilities of some larger corporations and cross sell the HSA product there. And we're going to be building out our treasury management capabilities. So everything we're doing as a combined organization gives us an opportunity to move prudently up market, expand the customer base, and sell through what the two banks do really well to each other's customer base where applicable. So, that's one of the reasons that Jack and I are always smiling is because as we said in the model, we don't really have any of the incremental revenue synergies built into the model, but we know because we're both focused on the same markets. We're both focused on expanding commercial banking businesses and fee generating businesses that we have huge opportunity to accelerate growth on the top-line. And I will tell you, we will absolutely set very specific revenue synergy goals relative to cross selling as a result of this. You think about, John used the example of HSA. We have a ton of clients and Sterling that would benefit from the interaction on the HSA side of this thing. And by the way, Sterling itself is an HSA client of Webster's, which is an interesting cross sell to begin with on this thing.

But we have any number of opportunities out there and we have, what's great about the combined company. We have a lot of really unbelievably talented and smart folks that are experts in each of those verticals that we both mentioned along the way, and the ability for them to work together, to bring the solutions that another vertical has is very, very apparent. And there's a very clear path to ensuring that it's happening. And I emphasize, again, the point that John made, one of the biggest attributes of the combined company, this is a really great middle market and lower middle market company. So we put a lot of our chips on those segments. We think the consumer business is important. But the chips that we put is, is building a company that is very middle market and lower middle market focused, and the ability of us to really compete with some of the big guys out there. I think with a size organization that's $63 billion or $65 billion is pretty apparent.

[Christopher Keith, D.A. Davidson]

Got it, thank you. And just turning back to the technology discussion, some of the details of the opportunity and, and the cost saves and landing on a more similar service providers. But I'm curious on some of the investments that may cause some of the cost saves not to drop to the bottom-line initially. You talked about some of the opportunities in the banking as a service, but are there any specific details around the technology platforms and investments that may be made early on?

[Glenn MacInnes, CFO]

I'm sorry. Go ahead, John.

[John Ciulla, Chairman and CEO]

We were talking about early in terms of our cost saves, the net cost saves being a 11% of the combined organization that builds in the fact that we've provided a cushion for us to invest specifically in technology and people. And if you look at it, almost a $100 million over five years that we have a capacity without impacting our ability to get that net cost saves of a $120 million. So, as we've said several times what's important about this transaction is the cost synergies really free up investment capacity, because we think we have growth opportunities to expand the business. And so it's not just about creating value on those costs saves themselves, but we set a very reasonable and conservative bar on the net cost saves, because we wanted to build in enough capacity in cushion so that we could continue to invest in banking as a service in HSA, in our transition to digital delivery for our consumer customers for treasury products. So we feel really good about being able to deliver that net number.

[Glenn MacInnes, CFO]

Yes, I'm just going to emphasize what John said. This is a net number. So usually, you could argue that we could set a goal of 15% to 20% core expense reductions. The 11% is actually the net number -- we're making strong investments and things like HSA as an example, digitizing everything as it relates to the client, automating all the manual back office functions. Those are the types of investments that we will make in those categories, getting fantastic data alignment along the way. Certainly, we just looked at, we've created a roadmap on technology spends to digitize and to automate the back office, but the additional spend of another $15 million to $20 million to get all the data right, it's pretty tough to make as a $30 billion company as a $65 billion company to get data correct and at the hands of each of our colleagues is the type of investment we can afford and make out of this. We think we've lined the expense and investment dynamic up correctly on this.

[Christopher Keith, D.A. Davidson]

Got it, great. And then -- I'm sorry, just real quick, Luis, can I just confirm that it sounds like you have not chosen who you plan to use for the combined entity in core processing and digital banking services as your provider yet, correct?

[Luis Massiani, COO, Sterling]

Not yet. That's going to be one of the first and key decisions that we're going to evaluate and we will come to a decision there pretty quickly, but there's plenty of opportunity. And as John and Jack just alluded to, you can imagine that a company with the size and diversified businesses that we have is going to be a great client for any host of potential digital technology providers. So, we very much like the spot where we're in and we think that we're going to be able to partner with somebody yet very cost effective economic costs and so it should be a great opportunity for the combined company.

[Christopher Keith, D.A. Davidson]

Great. Thanks for taking my questions.

[John Ciulla, Chairman and CEO]

Thank you.

[Glenn MacInnes, CFO]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Steven Duong with RBC Capital Markets. Please proceed with your question.

[Steven Duong, RBC Capital Markets]

Hi, god morning, guys.

[John Ciulla, Chairman and CEO]

Good morning.

[Steven Duong, RBC Capital Markets]

Hi, so I guess just on the consumer side, how are you guys thinking about your respective consumer businesses and their footprints? Is there an efficiency ratio hurdle that you're targeting for the consumer business?

[John Ciulla, Chairman and CEO]

So, let me start, and then Jack and Luis can go. It's interesting where they're actually -- we've taken similar approaches to making sure that we're both companies are delivering for their client bases, but also taking the opportunity to optimize the cost structure in the delivery channels, right. We both want to meet our customers where they want to meet us. We know that increasingly less in banking centers and more through digital channels. So I think both companies have been on that journey I think in different stages with slightly different strategies.

The interesting thing about it is, we announced obviously in December the fact that we were consolidating 26 banking centers and we're just finishing that up now. And obviously Jack and his team have also done consolidation on their side. But coming into this transaction with these two companies, there are no immediate plans for significant branch consolidation. We'll continue to strategically look at the whole network, and as both of us have said on our public calls, we know that we'll have less square footage over time than more square footage. That's just going to be the trend. But interestingly is where we are, we don't need to dramatically change the banking center footprint at the outset to make this deal work. And it's not included in the significant financial benefit upfront.

So what I would say is we're going to try and harmonize the way we approach the market over time, make sure that $20 billion in deposits from great consumers that love banking with us, stay there and that we make sure we continue to delight our customers through whatever channels they want, but it'll be a process of harmonizing and I think we're both, and you've seen Webster and Sterling sort of say, we're stewards of capital and we deploy capital to those businesses that have the highest opportunity to generate economic profits over time, so you've seen both of these banks, the real reason that Jack and I are sitting across the table is you've seen both of these banks over time, transition to a more commercial footprint with an optimized and stable and solid retail footprint and we care about those customers deeply, but we make sure that we're efficiently and effectively delivering for them.

[Jack Kopnisky, President and CEO, Sterling]

Yes, the other thing I've mentioned, you think about deposit channels, I think this is the best mix of funding channels with the client that you can get. So we want to provide, as John said, a great client experience, but from a financial standpoint, you have really low cost, highly effective consumer financial centers, you have commercial teams that do a great job of again driving low cost long-term relationship deposits. You have HSA business that is a superior deposit provider of low cost long-term deposits. We build out some online functionality with some other brands. So, we found that's been effective. And, as Luis mentioned, the banking as a service is a growing and greatly opportunistic source of deposits and fees. And then you supplement that with all the wholesale deposit gathering all that, those types of things. So we think of these things, as channels were on the front end, we want to provide great experiences.

On the back-end, we think the funding dynamic of these, this diverse group of channels is effective, you think about how banks have grown up, we grew up by mostly getting all of our deposits through branches. That's not what clients want now, they want other channels. So we're being able to both provide those channels to the client, and benefit from the diversity of the funding sources.

[Steven Duong, RBC Capital Markets]

Understood. Appreciate that. And then, just moving on to the balance sheet side, obviously this quarter, there's continuing rise in liquidity, both your balance sheets, how are you guys thinking about handling this liquidity in the next couple of quarters with the chance of even more liquidity coming onto your balance sheets?

[Glenn MacInnes, CFO]

Yes, Steven, hi, it's Glenn. I think what I would tell you is for modeling purposes, we're conservative and we assume no adjustment from where we're today. We don't want to put our excess liquidity in assets today. And they're not either not available or not attractive to us from either a rate or duration standpoint. So all the modeling assumes that we basically preserve that liquidity ex the 4% balance sheet growth that I indicated earlier.

[Jack Kopnisky, President and CEO, Sterling]

I think I can speak to John's comment will be, we're not going to do stupid things out there by extending risk parameters and things like that, and chasing rates and chasing risk out there, this is a time that it will have a lot of excess liquidity, a lot of funds are flowing, there's a lot of cash out there, since the government's given away about now $2 trillion. There's a ton of liquidity out there. We have to be good risk managers in this. And that's both on the security side and the lending side. We're not going to go out long and try to get one more basis point because went from five to seven years on securities, or on the risk side, we're not going to change the things that we know are appropriate out there. So if we have to do buyback some things like that, return capital, that's fine. But as Glenn said, the models are very conservative. We're not extending ourselves out on this. Our view is there's just a ton of opportunity should rates and when rates go up and when deals get more attractive.

[Steven Duong, RBC Capital Markets]

Great. And congrats on the deal. Thank you.

[Jack Kopnisky, President and CEO, Sterling]

Thank you very much, Steven.

[Operator]

Thank you. Our next question comes from the line of Casey Haire with Jefferies. Please proceed with your question.

[Casey Haire, Jefferies]

Great, thanks. Good morning, guys.

[John Ciulla, Chairman and CEO]

Good morning, Casey.

[Casey Haire, Jefferies]

I wanted to circle back on the loan growth and mix question. So, you guys sound very committed to all the different lending verticals that you now enjoy as a pro forma institution? I was just curious, because multifamily on the Sterling side is a decent size book a little under $5 billion, a lot of which is Brokered New York from the Legacy [Historia] [Ph] side. So, I mean, does that comment that you're going to be committed to all these verticals include multifamily? And then, also do you guys have like a mix in mind, an ideal loan mix in mind for the pro forma bank?

[Jack Kopnisky, President and CEO, Sterling]

Yes. So, we're committed to all the verticals as long as they yield the right risk adjusted returns. So one of the great opportunities we have as you look at all those verticals, and frankly, John has done a great job of this and I think we've done a great job of this is moving capital around based on the risk adjusted return opportunities. So when there are, those opportunities in different economic and rate environments, we'll move capital to that. And where there are opportunities, where there are not opportunities we'll take capital away from that, we do need to be consistent in our view, but multifamily has always been one that's been most interesting. There're times that we've wanted to invest in that vertical. And there's other times that we've said the returns, the risk adjusted returns aren't what we expected.

And the answer to the question, we do have a mix, but it's not, our issue is more about concentration levels. We want diversity, we think best mid-size or approaching regional bank levels have diversity in both the asset side and the funding side because different economic situations and environments and rate environments, demand different movements in those portfolios. So, it allows us the ultimate flexibility to move capital around to the places where it should be.

[Glenn MacInnes, CFO]

Casey, if I could add, I'll refer you back to Page 8 in the deck. It's interesting, that together pro forma bar on the bar chart is pretty good as a proxy, I think Jack said there's this natural complementary nature of the portfolio, and if you think about it, as simple as you can, Sterling had higher CRE concentrations based on owner occupied CRE, the multifamily, the Metro New York, and we've grown and we have a pretty big C&I portfolio, including as you know, the enterprise reliant, leveraged lending stuff that we do in sponsor and specialty.

And when you look at the combined entity, whether you look at it as asset class relative to each other, whether you look at it in terms of regulatory concentrations as a percentage of Tier 1 capital plus reserves, we've really de risked the portfolio significantly and opened up a lot of capacity. And so, I know that all of our bankers at Sterling and at Webster right now who were listening to this call, who weren't under the tent are really excited right now I'm getting texts, as we're speaking from people who are ready to go because we really, we've always been stewards of risk management. And we've always made sure that we scorecard our exposures, and really what this does at the outset at close, is kind of replenish the opportunity to continue to go in any of those asset class directions without creating undue concentration. So, really excited about it, I think what you'll see is, as we said before, a decidedly commercial portfolio over time, and then within the commercial categories, a mix of real estate secured and fully followed lending, niche businesses, and then robust growth in C&I. And obviously, we'll talk further when we get a better handle on our targets.

[Casey Haire, Jefferies]

Yes, okay. And just question on the buyback, $400 million. How did you guys arrive at that and the 75% payout ratio was that, it just feels a little conservative given that you're going to end up at 11 CET 1 well above your target. And as a result, this quarter point out like it's, the loan growth environment is not very strong right now. So you could have a little bit more room on that.

[Glenn MacInnes, CFO]

Yes, no, we can, Casey. And I think that we reviewed and debated that we like, when you think about the hierarchy of priorities of what we want to do, first and foremost, we want to reinvest in the business. And so from the perspective of us having excess capital that can be redeployed to organic growth, that would be our number one priority especially to the point that John and Jack, were just up what you were just highlighting to the extent that we can continue to generate diversified commercial and consumer growth, that reinvest in compounds of return on tangible common equity, that's our number one priority.

And so, as we've alluded to here, right now, we have a conservative 4% growth number that's going through the numbers, but the ability to essentially substantially accelerate that especially in a more normalized in a loan growth environment as we move through the back half of this year into a more, a local economy that more fully rebound. So first and foremost loan growth, second substantial capital flexibility we love where it is to the extent that that loan growth doesn't materialize over some period of time, it's a great place to be from a perspective of being able to return more capital to shareholders through buybacks or through increased dividends and so forth. So, I think that both management teams have always had a philosophy of being pragmatic about the world, and we're going to continue to, that's exactly the conversation that we've had of continuing to run the company that way. And the combined company is going to have that same type of philosophy. So, to the extent that there's growth opportunities great to the extent that there are M&A opportunities, that's great too, and if we're going to stay disciplined on growth, but to the extent that those don't materialize, then we have a ability to return substantially more capital to shareholders and with being currently modeled there. So I would say that, yes, you're right, that we have more flexibility. And you can count on us to be good stewards of capital that we'll do what's best in the best interest of shareholders.

[Jack Kopnisky, President and CEO, Sterling]

And let me just point out on a note that, even from a modeling standpoint, even without the share repurchases, the accretion to Webster shares is still in excess of 20%.

[Casey Haire, Jefferies]

Yes, okay. All right, just last one for me; appreciate all the metrics provided in the deck. I'm not seeing the efficiency ratio, just wondering where you expect that to land for the pro forma bank. The reason I'm asking obviously is HSA. It seems like you guys obviously want to continue to be aggressively investing in that, just curious where you guys see that running.

[Glenn MacInnes, CFO]

So, Casey, it's Glenn. And sort of reflective of what's going to promote predominantly via commercial bank along with HSA, we think our efficiency ratio is going to run around 45% once we have the fully synergized expense reductions.

[Casey Haire, Jefferies]

And that's a level where you can continue to satisfactorily support HSA?

[Glenn MacInnes, CFO]

Yes, absolutely.

[Jack Kopnisky, President and CEO, Sterling]

Yes.

[Casey Haire, Jefferies]

All right, great. Thank you.

[Operator]

Thank you. Our next question comes from the line of Matthew Breese with Stephens. Please proceed with your question.

[Matthew Breese, Stephens]

Good morning.

[Jack Kopnisky, President and CEO, Sterling]

Good morning.

[Matthew Breese, Stephens]

Hey, just stay on the EPS accretion and share repurchases. Can you just talk about the timing of the share repurchase? Is that something on the Webster side that you can start now? Or do we have to wait until the deal close? And then as a follow-up on Page 25, the $400 million it appears to be on a weighted average here total of 3 million shares. Can you just talk about the implications of that and the assumed stock price?

[Jack Kopnisky, President and CEO, Sterling]

Yes, so let me take the first one, the purchases will be post-close, the share repurchases. And then, your second question regarding 3 million share repurchase, and some of these you can see back in our appendix, your question was with respect to the assumed purchase price?

[Glenn MacInnes, CFO]

What page are you on, Matt that you're referring to?

[Matthew Breese, Stephens]

Yes, page 25, there's 3 million shares assumed repurchased 400 million. So, the number six footnote there.

[Glenn MacInnes, CFO]

So, that's in the range of like 60-65.

[Matthew Breese, Stephens]

Okay. And then Jack and Luis, should we assume that on the Sterling side, your buyback program stops through the end of the year until the deal closes?

[Jack Kopnisky, President and CEO, Sterling]

Yes, it is a condition of the deal. That is new. It's based on what ownership splits are going to be for closing. And so at this point, we're stopping the buyback. And we'll not be buying back shares through the closing.

[Matthew Breese, Stephens]

Okay. I appreciate that. John, I know you talked about under a normal scenario what loan growth could be and high single digit, low double-digit. Could you just talk a little bit about the current pipeline Jack, you as well what your current pipelines look like and how you expect growth for each respective balance sheet to kind of trend throughout the end of the year?

[John Ciulla, Chairman and CEO]

Yes, sure. And I think the best way to describe our pipeline is building. So we're seeing some green shoots and particularly in certain areas where as you know, we've got some industry expertise in segments like technology and healthcare services. What we're still seeing is a drag from all of the businesses that have been most impacted by COVID, where people need to be places in order for revenue to be generated. And so you saw on both of our balance sheets in this quarter, not real robust loan originations in growth as much as we would have liked. So what I would say is the market is improving. We're seeing our pipelines up. I know that our pipeline in the commercial bank at Webster is actually up from a year-ago same period. And so that's encouraging. But I think it's going to be a while before we really see the full impact of a reopened and recovering economy. I don't know Jack, if you want to add anything.

[Jack Kopnisky, President and CEO, Sterling]

Yes, in our case, the pipelines going into the second quarter are strong. At one point in my career, I'd love to be able to come back and say that, "Loan growth in the first quarter was really great." I don't think I've ever figured that out. People max out the year-end, and then they build their pipelines again. But I think going into the second quarter, we feel good about the pipeline, and that all continues to build, I think the guidance we would give everyone on net loan growth or net loan outstanding growth through the end of the year. Lots of things will happen now with the deals out there. But in that kind of $1 billion to $1.25 billion range is the range that we've done. It's come down a little bit from the prior -- from the fourth quarter result, but given the pay offs and the originations for what we see now will have that type of net loan growth through the end of the year.

So, pipelines are picking up. And we feel good about where we are at. Again some day my career will actually have January, February, and March doesn't happen the way it usually does which is no volume in January; builds in by the middle of February. No volume in February, then good volume in March, and then into the second and third quarter really great volume. So, that's how we feel about the opportunities out there. And again, as we said before we are going to be selective and not jump at things and be smart about it as we go forward.

[Luis Massiani, COO, Sterling]

But one to add, Matt, on the Sterling side for first quarter results, the headline number isn't really or the headline loan growth or loan decreases isn't really indicative of what's happening in the various business lines. So, you had two places where we felt pressure. That was in mortgage warehouse lending which not surprisingly first quarter is always softer than the rest of the quarters. Then with the decrease in re-buy activity across the industry, you just see those balances decrease more so than they typically would. And then the second component is that we did not participate in PPP directly in the second round. So, we did not originate PPP loans. But, we actually you will recall in the fourth quarter and particularly in late December we actually sold off pretty much remainder of all our PPP loan.

So when you factor in and adjust for PPP and mortgage warehouse, loan balances were actually up across the board. And they were up in most business except for equipment finance which we feel very good as we're going to pick up on rebound in the second-half of this year. So, the origination engine and the pipeline of business is perfectly fine. You're going to start seeing the pressure that we saw from the mortgage warehouse perspective and PPP are not going to be there for the rest of the year. We don't believe if anything we think that we are going to see a rebound in the second quarter and the second-half of the year in mortgage warehouse. And so, we feel very good about the prior guidance that we have provided in fourth quarter of $1 billion and $1.5 billion. But as Jack mentioned, we just moving probably to the low end of that range as we move through the year based on what happened in first quarter. But, pipeline and the origination activity is as active as it has been and it's better. Similar to what John said it's better than what it was, substantially better than what it was at this time last year.

[Matthew Breese, Stephens]

Okay, understood.

[Jack Kopnisky, President and CEO, Sterling]

And Matt, I will give you one more data point. We usually talk about on the earnings call about pay off activity because so much of our commercial real estate and sponsor and specialty business is more transactional. And our originations were down -- ex-PPP down in the commercial bank modestly year-over-year Q1 '20 to Q1 '22. But pay offs were up a couple of hundred million from a year ago. And so that means that there is more activity going on in the market in terms of refinancing and portfolio and property purchases. So, we think that's encouraging. Even though it frustrates us, it doesn't mean we have to run faster to get that loan growth. It does mean that there is more activity out there which is a good sign.

[Matthew Breese, Stephens]

Okay. And then, on Page 15 you mentioned and I want to know this is for the entire bank that the pro forma margin is going to about $315, is that for at the closing? And could you just provide a little bit of margin guidance for each bank from now until the end of the year?

[Jack Kopnisky, President and CEO, Sterling]

Page of 15 of the -- [multiple speakers]…

[Matthew Breese, Stephens]

Yes.

[Jack Kopnisky, President and CEO, Sterling]

That actually is there really to just point out the fact that when you look at our ability to benefit and to leverage the full value of HSA that we get because we looked at the peer group folks like health equity and others in the market who basically aren't banks and they are selling off their deposits that we have -- through our internal processes, we are able to gain more as a lender if we can deploy those funds into the market that just talks about our ability as a collective company to benefit on margin from having HSA as a wholly-owned entity. It's not a statement about the pro forma margin of the entire company.

[Glenn MacInnes, CFO]

[Multiple Speakers] So that we see is the midpoint of where the companies operate today, but it's not a specific our goal modeled approach that we did that, Matt. That's a representative number where the companies are today. When you think about Sterling and what our NIM trajectory is going to be for the rest of this year, we had guided to in the fourth quarter to about a 315 to 320 NIM, excluding accretion income that was ended up being 330 for the quarter. We benefit that we did have a benefit for about five basis points or so that was driven by prepayment activity particularly in the multifamily and commercial real estate book. But across the board, the ability to generate better NIM was driven by two things. First and foremost, loan yields and loan origination yields have essentially plateaued or the decrease in that I guess it's not a plateau is not increasing, but it's a -- no they bottomed out from the perspective and they have stayed steady between Q3, Q4 now, Q1, so there's been stability to what we're seeing on the loan origination side.

There's been a slightly better reinvestment opportunity on the security side. And so you'll see that end of period securities balances for us did increase slightly. And that reinvestment was actually done at slightly higher yields than what we had contemplated when we provided our guidance at the beginning of the year. And then thirdly, we've continued to be very aggressive in managing cost of funds, and so you saw another big decrease across the board and in all of our deposit products. So we feel very good about beating the prior guidance that we provided in Q4. And so again, without getting too technical, we're not going to maintain the 330 through the end of the year because their growth going to be a little bit more pressure on that, but it should be well above the 315 to 320 range that we provided previously.

[John Ciulla, Chairman and CEO]

Yes, on a Webster side, you saw our 292 and that did include about six basis points relative to the PPP as I indicated in the comments, but it did also include about six basis points due to excess liquidity. And I mentioned that we were carrying about $680 million at this end and that was a drag on NIM. And I still feel when I look at our balance sheet and I take out and strip out PPP, that core depending on how liquidity plays out, our NIM coordinators were somewhere in the range of 279 for the quarter, but again, about six basis points of that, which will bringing it right to the 285, which due to liquidity.

[Matthew Breese, Stephens]

Okay. And do you feel, I mean, Luis talked about where Sterling's NIM could be, Glenn on your end, do you feel the 279, it stabilized at this point or you can even recapture some of that at the 285 as you deploy liquidity?

[Glenn MacInnes, CFO]

No, I do think it stabilized. I think, look, we ended the quarter at $1.2 billion and excess liquidity, and some of that starting to dry up. So I think that 279 is probably got some upward biases as we go through the year and we both loans things like that. So I still think as I said on the prior earnings call that our core NIM is probably running around 285, and then you're going to have the noise of PPP in and out every quarter.

[Matthew Breese, Stephens]

Okay. I have one last one, sorry to drown on the deal marks, just curious, where you took more aggressive haircuts, what categories, obviously these days, there's a lot of concern on COVID impacted areas, so curious what the marks are on hotel and restaurants, but also how you guys assess the office book and what kind of marks are taken there?

[Luis Massiani, COO, Sterling]

We're not providing specific rate marks per sub-portfolios and so forth. But what we can tell you is that, Glenn, myself, and a small army of 200 folks on either side, as you can imagine with all the things that are happening particularly in those verticals that you just mentioned of retail office hotels and so forth. We had a very detailed review of those portfolios and the end result of that review is that we agreed that the Sterling approach, which has been pretty conservative in marking those portfolios and in trying to deal with those portfolios head on since the beginning of the pandemic was kind of fully reflected in the reserves that Sterling had that $223 million bucks of total ACL today.

And the 1.53% or so of ACL, the total loans that Sterling has as of Q1. So again, that was the diligence focus and rightfully so, obviously because of the dynamics that New York city area is going through, but you put out I think research report a couple of weeks ago, and we've seen three or four other analysts do the same. Things are getting better in the New York City area. It is reopening and it's starting to reopen their specific verticals that are not fully open yet. So yes, hotels continue to be somewhat strained. Retail continues to be somewhat strained, but you're starting to see more traffic. You're starting to see more economic activity. And so we're very confident that again, we're not thinking about this with rose colored glasses of there isn't going to be charged off. There will continue to be some charge off activity as we move through the end of this year. But we are very, very confident with the reserves and the excess capital position that we have today and being able to manage out of those.

[John Ciulla, Chairman and CEO]

Yes. And just to Luis's point, I mean, just a little more color. I mean, we did conduct extensive file review of more than 80% of each other's COVID impacted sectors. And by that, I mean, the retail, hospitality and commercial office space, we feel really good about at the end of the day where we ended up on both the PCD and the non-PCD market.

[Matthew Breese, Stephens]

Great, that's all I had. Thanks for taking my question.

[John Ciulla, Chairman and CEO]

Thanks. Thank you, Matt.

[Operator]

Thank you. Our next question comes from the line of Laurie Hunsicker with Compass Point. Please proceed with your question.

[Laurie Hunsicker, Compass Point]

Yes. Hi, good morning.

[Jack Kopnisky, President and CEO, Sterling]

Good morning, Laurie.

[Laurie Hunsicker, Compass Point]

Super quick on timing, we are in the fourth quarter, are you expecting your close? This is going to be an early fourth quarter or mid, late? How should we think about that?

[Jack Kopnisky, President and CEO, Sterling]

Well, we hope as soon as possible, right. So John and I have both talked in great detail to both the Fed and the OCC. And frankly, they've been very supportive of their ability to -- we give them an application, their ability to react with the right pace. If you think about this, this checks all the boxes relative to what regulators would like to see. Company has lots of capital, good earnings, good credit history, good relationships, people that have done deals before. So we feel confident that this will move through the process pretty quickly. And so, we expect as soon as possible. Deals today have been taking three to six months to get done. So announcing this now it's in that that range.

[Laurie Hunsicker, Compass Point]

Perfect. Okay, thanks. And then on to branches, if I look at your two companies together pro forma where we are right now, you're 224 less you have 18 still to go on your branch count reduction takes you to 206. Can you help us to think about -- first of all, is that 206 the right number? And then how are you thinking about branch closures? Can you fine tune that with respect to the cost saves you've laid out?

[Jack Kopnisky, President and CEO, Sterling]

Yes, Laurie, what I'd like to say now is obviously the cost saves that we've promised in the transformational project that we did are -- reflect those last closures that we have to come up at Webster. And I really -- I don't want to make any promises. We believe that right now we're going to take the same approach that both banks do, which is to constantly look at the branch footprint, look at the customer base, look at customer behaviors, and try and maximize our ability to deliver for our clients while reducing real estate expenses that aren't necessary.

And so I think over time, as I said, in the outset pro forma, there aren't significant branch closure savings in this model. There may be a few strategic consolidations over time in over the next year, but we're going to go through that as we do the integration look at holistically -- actually you see that these two footprints kind of come together perfectly right in Westchester County. There's very little overlap. So we'll be looking strategically as we do our integration at how we're servicing our customers. And closer to close, we'll be able to give more indication of what the pro forma footprint will look like, but less square footage over time, but prudent, so that our communities and our customers aren't impacted disproportionately.

[Laurie Hunsicker, Compass Point]

Got it, okay. And then a few quick questions here on the commercial book. Multifamily 4.4 billion, how much of that actually resides in New York today?

[Glenn MacInnes, CFO]

The majority of it.

[Laurie Hunsicker, Compass Point]

Majority, okay, right. Do you have an LTV…

[Glenn MacInnes, CFO]

Vast majority of, yes…

[Laurie Hunsicker, Compass Point]

Do you have an LTV on that?

[Glenn MacInnes, CFO]

LTV, it's -- if you look at our prior earnings decks, which we did not put out in earnings after the first quarter, our IR deck for the first quarter specifically related to our results, but if you go back to the Q3, Q4, you'll see very descriptive information on that. And on average, the weighted average LTV of that multifamily portfolio were just under 50%.

[Jack Kopnisky, President and CEO, Sterling]

And I would tell you that the multifamily properties are actually in the boroughs and Long Island, vast majority of them.

[Laurie Hunsicker, Compass Point]

Right, okay, perfect. And then, on the CRE book, the $6 billion, 10% criticized, can you just drill down just a little bit more in terms of how much of that is New York City proper?

[Glenn MacInnes, CFO]

So that is actually a much more diversified book than the multifamily book is from the perspective of New York City proper. So, when you think about the exposures that we have that we are most focused on, it is retail and office CRE in Manhattan and part of that being in Midtown Manhattan -- so most of that being in and around the Midtown Manhattan area, and that is approximately $1 billion of total exposure. Now that is not all of that is criticized and classified, but that is that the -- if there was a -- in the hierarchy of portfolios that we were most focused on from a near-term performance perspective, it's that, that component of the book, that's where the vast majority of our ACL or, and our reserves sits in commercial real estate.

[John Ciulla, Chairman and CEO]

And again, those are also in that 50%, 55% LTV range.

[Glenn MacInnes, CFO]

Yes.

[John Ciulla, Chairman and CEO]

And Laurie, I know that's a question for the Sterling guide, but I can tell you, as Glenn said, that's the area that we did extensive diligence on. We also brought in a third-party to focus and double-check our work on specifically New York City retail hotel and office. So obviously we spent a lot of time on that and focus on that as well.

[Laurie Hunsicker, Compass Point]

Perfect. Thanks for taking my questions.

[John Ciulla, Chairman and CEO]

Yes. Thank you.

[Glenn MacInnes, CFO]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

[Ken Zerbe, Morgan Stanley]

All right, great, thanks. Just to go back to the HSA business, maybe it's 515 or not, but, but in response to one of the other questions about HSA, somebody mentioned that this supercharges your growth, and I guess I just, I don't understand how this supercharges your growth. Are you saying that the combined entity is now going to be able to outgrow the industry average growth rate HSA in any kind of meaningful way?

[Glenn MacInnes, CFO]

Ken, our statements collectively, because I think both of us are enthusiastic about it, is that we are, we have now identified an ability to free up more capital and more expense dollars to invest in technology and to keep our competitive momentum in that market. And yes, as the market continues to consolidate significantly. I think the top five players now have close to 60% of the market and everybody's moving pretty quickly. So I think when we say supercharge, it just enables us to grow sales capabilities, products, accelerate some of the technology roadmap that we have right now in terms of employee and employer portals that we are in the process of building. So I think the safest thing for me to say is it, it allows us to focus more. It allows us to deploy more capital and expense dollars, which in term, if we execute, should allow us to increase our relative performance versus peers.

[Ken Zerbe, Morgan Stanley]

Okay, understood. And then just a second follow-up question, I don't say Webster was undertaking a pretty big expense initiative in terms of cutting branches, et cetera. How much of that expense program was actually in anticipation of this transaction? Because I think Jack mentioned, you guys have been talking for a couple of years on potentially combining the banks?

[Glenn MacInnes, CFO]

Yes, the answer is zero. And I guess you'll see all the details at some point in the merger proxy. So we actually hadn't been talked, and I'll also rationalize Ken kind of all of our discussions over time. We've been focused very internally, as Webster. And I'm asked that question on every call. Jack and I met about 27 months ago and talked a lot about just our philosophies on banking and we got a chance to meet each other socially and enjoy each other's company. And I think one of the things to stress that you heard today is that we have a similar focus on where banks our size can continue to differentiate and those are in the less commoditized, more commercial areas. So, we've talked on and off about the future and how important scale is and thought about whether or not there was a combination actuality during the pandemic.

Obviously we had no discussions around putting the banks together, because no one knew what the future was going to hold for capital and liquidity and credit in the markets. And so when we embarked on that program in January of 2020, and then decided to double down on it, Jack and I weren't talking about putting banks together. And so we made all those decisions in those announcements in the fourth quarter. We had no merger discussions going on and it wasn't until it looked like the coast was clear from a capital and credit perspective that we revisited that. And we've also been really careful and obviously it's incumbent upon us to execute, but to say that the deal cost saves here are separate and distinct from what we promise the market. So we're still driving hard to get that 8% cost reduction in our run rate based operating expenses, and then people can lay the deal math over that number pro forma.

[Ken Zerbe, Morgan Stanley]

All right, thank you.

[Glenn MacInnes, CFO]

Thanks.

[John Ciulla, Chairman and CEO]

Thanks, Ken.

[Operator]

Thank you. Ladies and gentlemen, our final question this morning comes from the line of David Bishop with Seaport Global Securities. Please proceed with your question.

[David Bishop, Seaport Global Securities]

Yes. Good morning, gentlemen.

[John Ciulla, Chairman and CEO]

Good morning.

[David Bishop, Seaport Global Securities]

Jack, you know, it hasn't been too much discussion, but wanted to focus your end. Here both of your perspectives just on legacy, credit quality, I guess Jack, covering Sterling, just all a little bit of a tick up in terms of the criticized classified assets. Just maybe just a holistic high-level view, what you're seeing from a credit perspective, maybe from both franchise?

[Jack Kopnisky, President and CEO, Sterling]

Yes. So, on our side, David, I think that it was very much in line or performance for end of period March 31st was very much in line what we talked about in the first quarter, sorry, in the fourth quarter earnings call. So in early January, which is that we still anticipated to see a slight uptick in criticized classified in the first quarter. And so it was, we had guided to it being substantially a substantially smaller uptake than what you had seen between the third and the fourth quarter. And as you can see, as of March 31, it was substantially smaller than what we had seen to round out the year. The issue with the criticizing classifieds is more credit policy driven. As we talked about in the fourth quarter, we're classifying these loans because you're still in a situation where for some components in verticals in the New York city area, you're seeing that service coverage ratios that are below one.

And so, under our credit policy, similar to what we talked about in the fourth quarter, that is a criticized or classified loan, depending on the components of the loan. However, we continue to be very encouraged by the fact that we're seeing a substantial amount or we're seeing guarantor support across the board for the vast majority of relationships and properties that have that criticized and classified dynamic to them. And were our debt service coverage ratio was today are below one. With that said, we're also very encouraged by the fact that we're starting to see a substantial uptick in cash flows again for all of the verticals, including retail office, multi-family and so forth and so.

Again, as I said before, we're not looking at this with rose colored glasses and we're not declaring victory just yet. That's one reason as to what we've decided to maintain our ACL total loans at that 150 level and that $325 million or so ACL. We're very confident with that number based on what we're seeing in trends in the portfolio, but we're not yet in a point where we're releasing reserves, because we're seeing criticizing classified stay there. As those platforms are coming down, we should start getting to a reserve releases relative to the long-term targets that we've set of about 1.1% to 1.2% of ACL, the total loans.

[David Bishop, Seaport Global Securities]

Great, thank you.

[Jack Kopnisky, President and CEO, Sterling]

We were asking for us to comment as well?

[David Bishop, Seaport Global Securities]

Sure. I'd love to hear your perspective as well.

[Jack Kopnisky, President and CEO, Sterling]

I mean, I think you heard we were -- we had surprisingly strong credit quality metrics and in all categories in classified and non-performers and charge-offs down. I think we're in the same place where we're not ready to just kind of declare full victory and says a stimulus and liquidity runs off for some more impacted borrowers. We're obviously staying diligent, but we couldn't be more pleased with the credit performance of the bank and we feel like we've got a good handle on it. And so on our side, everything's looking up.

[John Ciulla, Chairman and CEO]

Where our coverage is at 1.64% as of the quarter end, and I think if you look at it and you say in a more encouraging macro-economic environment, you just have to look at our day two season reserve, which was like the coverage of 133 to get a sense of, on a normalized environment what it would look like.

[Jack Kopnisky, President and CEO, Sterling]

And both banks have a substantial amount of their ACLs represented by qualitative factors today. So the credibly conservative view that we're both taking is not driven by actual quantitative modeling results, it's driven by properly. So I think both management teams taking conservative view and again, not declaring victory just yet, but feeling very good about what the future outlook holds from a credit perspective.

[David Bishop, Seaport Global Securities]

Got it, appreciate the color.

[Jack Kopnisky, President and CEO, Sterling]

Thanks, David.

[John Ciulla, Chairman and CEO]

Thanks, David.

[Operator]

Thank you. I'm sorry. Go ahead, sir.

[John Ciulla, Chairman and CEO]

No, not at all, we all just want to thank everybody for joining the call. Have a great day.

[Operator]

Thank you. This concludes today's conference. You may now disconnect your lines.