Webster Financial Corp
NYSE:WBS
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Webster Financial Corp
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Good morning and welcome to the Webster Financial Corporation’s Second Quarter 2021 Earnings Call. I will now introduce Webster's Director of Investor Relations, Kristen Manginelli. Please go ahead, ma’am.
Thank you, Melissa. Good morning and welcome. Earlier this morning, we issued a press release to announce Webster Financial Corporation’s second quarter 2021 earnings. On the call today, we will provide some brief comments regarding the company's second quarter earnings. Today's presentation slides have been posted on the company's Investor Relations website.
Before we begin our remarks, I want to remind you that the comments made by management 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.
Thanks Kristen. Good morning and thank you for joining Webster’s second quarter earnings call. CFO Glenn MacInnes and I are here in Waterbury and we will review the business, financial, and credit performance for the quarter. I will also provide a brief update on our partnership with Sterling. At the end of our presentation Glenn and I will be happy to take your questions. While some uncertainties related to the virus remain, data is positive in the Northeast and we remain optimistic about the positive economic and social activity trends across our footprint. We continue to forecast more robust economic activity in the second half of 2021 but are always prepared should the path of the virus take an unexpected turn.
The second quarter of 2021 was a terrific quarter for this company on all fronts. Our financial performance was solid including strong loan growth, positive credit metrics, and continued expense management. We are executing on the strategic initiatives from our comprehensive organizational review delivering incremental revenue and making significant progress towards our fourth quarter 2021 cost savings target. And lastly, the Sterling merger, integration, planning, and design has done very well since announcing our partnership in April. We are confident in our ability to deliver on the financial metrics previously disclosed as we build a Powerhouse Northeast banking franchise.
Starting on Slide 2. We delivered strong business performance in the quarter. Excluding PPP we grew loans by 3% or 12% annualized with $2.3 billion in total loan originations. Transactional and total deposits continued to grow and we entered the second half of the year with increasingly favorable and strong credit capital and liquidity positions. Our adjusted earnings per share in Q2 were $1.21 up from $0.57 a year ago. Our second quarter performance includes $18 million of pretax charges related to the merger and our strategic initiatives. Glenn will provide additional perspective on these charges during his remarks. An improved economic outlook along with favorable asset quality supported a $21.5 million CECL allowance release in the quarter. Our second quarter adjusted return on common equity was nearly 14% and the adjusted return on tangible common equity was 17%.
Turning to Slide 3. Reported loans grew 0.8% linked quarter or 3.2% when you exclude PPP loans. PPP loans decreased 462 million as a result of net forgiveness activity in the quarter. Excluding those PPP loans, commercial loans grew 3.8% more than 500 million from prior quarter and were up almost 4% from a year ago. This was a very strong quarter for commercial banking with 1.6 billion of loan originations up solidly from Q1 and a year ago when excluding PPP. Loan fundings of $1 billion doubled Q1 when we exclude the PPP loans. In commercial banking we continued to benefit from our industry expertise and deep relationships across all chosen sectors. In this quarter commercial loan growth was driven primarily by growth across our entire middle market franchise and sponsor and specialty verticals. Consumer loans grew 1.9% or 120 million from first quarter and declined 5.7% compared to prior year. The linked quarter increase reflected seasonally strong purchase mortgage activity during the traditional home buying season. Overall residential mortgage activities drove $800 million of consumer loan originations up solidly from Q1 and from a year ago.
I'm now on Slide 4. Deposits grew 9.5% year-over-year while deposit costs continued to decline and were seven basis points in the quarter. Commercial bank deposits were up more than 14% from a year ago resulting from municipalities and excess liquidity among clients across all lines of business and all geographies. Retail banking deposits grew 7.2% year-over-year with consumer and small business deposits growing 5.8% and 16.7% respectively. Retail deposit costs continued to decline and totaled just seven basis points in the quarter.
We see more positive trends in our HSA business as we begin to return to pre-pandemic business activity levels. Core new account openings were 17% higher from the prior year, driven primarily by a rebound in our existing direct to employer business. Overall core accounts grew 3.3% year-over-year with strong core deposit balance growth of 11.8%. Total footings grew 19% year-over-year supported by growth in investment balances. Interchange revenue at HSA was up 28% year-over-year as consumer spending on healthcare has returned to pre-pandemic levels in the quarter, a trend we see as a positive sign for our business overall. HSA deposit costs were nine basis points down six basis points on a year-over-year basis as we remain disciplined in this low interest rate environment. I'd also like to note in the quarter the TPA accounts and balances declined 38,000 and 120 million respectively compared to the first quarter. This TPA accounts which we disclosed previously continued trend at a slower pace than originally anticipated.
Moving to Slide 5. I'll provide an update on the integration process related to the merger. I shared on the call in April this combination drives diversification, scale, and unlock significant revenue growth opportunities across our differentiated commercial businesses, health savings, and consumer banking businesses. Working closely together with Jack Kopnisky and bankers across both organizations, we continue to reaffirm the complementary nature of our companies from the business and culture standpoint. We remain focused on using the elements of both company’s business attributes and cultures to build a distinctive and result oriented organization. We have begun executing on a comprehensive integration plan guided by four overarching strategic principles. One, value creation by delivering on the merger economics we set forth in April. Two, customer first by focusing on client engagement and retention of customers and clients through the process. Three, conversion and continuity by leveraging the positive and forward thinking integration mentality. And four, risk mitigation by managing execution risk and delivering on a robust risk management framework. We have established an integration office and named leaders to govern work streams and manage integration planning activities across all business lines and functions.
We are leveraging the appropriate internal and external resources to ensure a successful integration. As shown on the timeline, we achieved several key milestones including naming our Executive Team. The regulatory approval process remains on track and our shareholder meeting related to the merger will occur on August 17th. We continue to expect the transaction to close early in the fourth quarter. We're making significant progress on this combination and I can tell you that the Webster team is even more excited about this combination today than we were on the announcement date. Webster and Sterling are individually strong performers and together we are creating a differentiated best in class commercial banking Powerhouse. We have outlined the strong value we're creating for our shareholders and we know there is tangible and material revenue upside as we get to legal day one and begin to deliver for our clients and customers across the broader geographic footprint. With that I'll turn it over to Glenn for the financial review and more details.
Thanks John. I will focus on key aspects of performance in the quarter which included strong loan growth, improved credit performance, and further progress on our strategic initiatives. I'll begin with our average balance sheet on Slide 6. Average securities declined 55 million or less than 1% linked quarter. Securities represented 26% of total assets at June 30th. During the quarter we purchased approximately 600 million in securities with a yield of 1.59% and a weighted duration of five years. Securities called, matured, or paid down totaled around 500 million with a yield of 2.24%. Average excess liquidity being held to Fed totaled 1.3 billion and increased 590 million on average linked quarter. This was driven by an increase in consumer and commercial transactional deposits.
Average loans declined 68 million or 0.3% linked quarter, primarily driven by 163 million in lower PPP loans. During the quarter, forgiveness on PPP loans totaled 532 million. In Q2 we recognized 10.6 million of PPP deferred accretion and the remaining deferred fee balance totaled 31 million at June 30th. Excluding PPP, our average commercial loans grew 161 million or 1.2% while consumer loans declined 66 million or 1%. While average loans declined, period end loans adjusted for PPP forgiveness grew by 636 million or 3.2%. The growth reflects a 26% increase in total originations from the prior quarter driven by higher commercial real estate and residential mortgage activity.
Average deposits grew 446 million or 1.6% linked quarter. The increase was driven by consumer and commercial transactional deposit products, resulting from government stimulus payments, Round 2 PPP loan fundings, and customer liquidity. The growth in transactional deposits was partially offset by a decline in higher cost CD's. Average borrowings declined by 21 million from Q1, borrowing's represented 3.6% of total assets at June 30th, compared to 9.2% a year ago. The loan to deposit ratio was 74% at June 30th. The common equity tier one ratio decreased 24 basis points linked quarter to 11.65%, driven by the increase in commercial and residential loans. Our tangible common equity ratio increased to 7.91% and will be 21 basis points higher, excluding 800 million and 0% risk weighted PPP loans. And tangible book value grew 2% linked quarter and 5.8% from prior year.
Slide 7 highlights are GAAP performance and adjustments to reported income available to common. During the quarter we recognized 16.8 million of after tax charges related to the merger and another 800,000 from our strategic initiatives. On an adjusted basis, income available to common was 109 million or $1.21 per share, resulting in a 13.9% return on average common equity and a 17% return on tangible common equity. On Slide 8 we provide our reported to adjusted income statement. Net interest income declined by 3 million linked quarter, reflecting a quarter-over-quarter decline of 5 million in PPP fee accretion, partially offset by lower funding costs of 1 million and one additional calendar day. NIM of 2.82% declined 10 basis points from prior quarter, split between lower PPP fees and increased liquidity held at the Fed.
As compared to prior year, net interest income declined by 3.6 million, this was the result of lower market rates, which reduced net interest income by 21 million and was partially offset by 17 million in lower deposit and borrowing costs. Non-interest income decreased 4 million linked quarter, primarily driven by fair value adjustments of 5 million on customer derivatives due to decline in forward interest rate curves and lower mortgage banking fees, partially offset by higher deposit service fees. Compared to prior year, non-interest income grew by 12.6 million. This reflects an increase of 5.6 million in deposit service fees driven by higher debit transaction volume of 33% in HSA Bank and 15% in the retail bank. In addition, non-interest income growth included the fair value adjustments on customer derivatives, higher wealth, and HSA fee income, partially offset by lower mortgage banking revenue.
Adjusted non-interest expense declined 9.9 million from prior quarter, reflective of continued progress on our strategic initiatives, which I'll discuss on an upcoming slide. Versus prior year, non-interest expense declined 7.8 million due to lower compensation and benefits, occupancy costs, professional service fees, and deposit insurance. Pre-provision net revenue of 125 million -- pre-provision revenue was 125 million in Q2. This compares to 122 million in Q1 and 108 million in prior year. Our CECL provision in the quarter reflects a benefit of 21.5 million, which I'll discuss later in more detail. The adjusted tax rate was 23.7%, an increase of 156 basis points linked quarter, driven by an increase in estimated taxable income and a decrease in excess tax benefits. The net result is an adjusted net income of 109 million or a $1.21 per share, down from a $1.25 per share in the prior quarter.
Now, let me provide an update on our progress related to our strategic initiatives announced in Q4 of last year. As you can see on Slide 9, we remain on track to deliver an 8% to 10% reduction in core non-interest expense and expect this to be fully realized on a run rate basis in Q4. Highlights of the initiatives include the consolidation of 26 banking centers, organizational actions to streamline execution and delivery for our customers, optimization of corporate real estate, and in June we launched our new digital account opening experience for consumers.
Turning to Slide 10, I'll review the results of our second quarter allowance for loan loss under CECL. In the quarter, we reported 21.5 million benefit to provision and a $20 million reduction in the allowance. The allowance coverage ratio, excluding PPP loans declined from 1.64% to 1.49% with total reserves of 308 million. As we look at the trend from Q1 to Q2, we built 10 million in reserves related to commercial and residential loan growth, which was more than offset by a $31 million reduction due to improved credit quality and the macroeconomic trends. Credit quality improvements include a net recovery recorded in the quarter and downward trends in non-performing loans and commercial classifieds. In addition, our macroeconomic forecasts reflects improving trends and unemployment, GDP and housing prices.
Slide 11 highlights our key asset quality metrics which continued to improve. Non-performing loans in the upper left decreased 30 million from Q1. Commercial, commercial real estate, residential mortgage, and consumer each saw linked quarter declines. Net charge offs in the upper right reflected 1.2 million in net recoveries largely driven by consumer from the strong housing market. Commercial classified loans in the lower left decreased 102 million from Q1 and represented 262 basis points of total commercial loans. Improvement was driven by credit upgrades and pay downs within the sponsoring specialty and middle market businesses.
On Slide 12, we provide detail on payment deferrals related to the pandemic, which have declined across the board, down 121 million or 48% linked quarter and 182 million or 58% from year-end. At June 30th, total deferrals represented 0.6% of total loans. Slide 13 highlights our strong capital levels. Regulatory capital ratios exceeded all capital levels by substantial amounts. Our common equity tier one ratio of 11.65% exceeds well capitalized by more than 1.2 billion. Likewise, tier one risk based capital of 12.28% exceeds well capitalized levels by 980 million.
With respect to the third quarter, we expect average core loan growth, which excludes PPP to be approximately 2.5% subject to individual loan funding and pay-off activity. We expect PPP loan forgiveness of approximately 300 million. Net interest income will be relatively flat while net interest margin will be driven by the level of excess liquidity and the rate environment. We expect non-interest income to be in the range of Q2 levels. On expenses we expect to continue to make progress on our Q4 goal of 8% to 10% core cost reduction. And the tax rate will be between 22% and 23%. With that, I'll turn things back over to John for closing remarks.
Thanks a lot, Glenn. We remain committed to delivering for our bankers, our customers, our communities, and of course, our shareholders consistent with our overarching objectives of maximizing economic profits over time and creating long-term franchise value. I want to take a minute to thank each of our bankers for their dedication, perseverance, and hard work. Our bankers have met the challenges of a pandemic, a year-long comprehensive organizational and strategic transformation program, and the announcement of an integration work associated with a game changing merger. We expected a lot from our team and as our values based bankers always do, they delivered with professionalism, competence, and enthusiasm. Their commitment has enabled us to continue to deliver for all of our stakeholders. With that Melissa, Glenn and I are prepared to take your questions.
Thank you. [Operator Instructions]. Our first question comes from the line of Matthew Breese with Stephens, Inc. Please proceed with your question.
Good morning.
Hey, Matt. How are you?
Good. First question, maybe could you talk a little bit about the asset sensitivity of the combined institution and I really want to get a sense for how much of the combined portfolio will be subject to floating rates and subject to floors?
So Matt, good morning, it's Glenn. So if you look at the combined organization, we're very similar from an asset sensitivity standpoint and you can see back on -- back in the appendix our asset sensitivity to a rising 50 basis points. If I look at it and I look at the floating and periodic basis, so total loans say 41 billion, of that I would say about 26 billion is floating in periodic. Now there are some of those that have loans of floor. So you're probably back at about 4 billion to 4.5 billion of floors. And so that remaining piece, once you back that out, that's really which would be subject to the first 50 basis point move say in rates. And that's where you would expect to get the asset sensitivity. I think the wild card here is on deposit betas. And so, there's been historical data that have been around 32%. I think that has come down, has come down significantly. If you look at our asset sensitivity, we're showing a 6% increase in PPNR if we get the first 50 basis point moving rates and a lot of that's driven by our reduction in deposit betas. And so you see that's come down to like from 34% to 28%. So I think that's going to be the wild card as we begin to see rates rise. I think there'll be a lag and it could be anywhere from 0% to 15%, to be honest with you.
Great, okay. Next one from me, just on HSA third party accounts, the TPA accounts are rolling off slower than expected. I'm sorry if I missed it, but what's the remaining account balance that should roll off there and what's the new projection for when that transition is complete?
I think the remaining account balance and I just say we have that back on the slides, if you like, in the appendix 276 million in balances. And I think the account balance is 246,000 accounts. So, if you go back on that and you look on our deck, you'll see that on Page 16 where we spiked out the TPA balances and the accounts. So as John mentioned, there was about 120 million that moved out in the quarter and that was about 38,000 accounts.
And Matt just to remind you we talked about that. It seems like 10 years ago, but it was third quarter of 2019 based on a transaction, the wage work transaction with health equity and another one of our sort of custodian accounts getting their own deposit charter. And so, we really don't have control of the timing of the departure. And we also get exit fees during the quarter they leave. So at least in the short-term, there's not a big economic impact. Over the long term, obviously we will replace those with accounts that are core to us, that are more profitable ultimately.
OK, and then last one for me. I just noticed that in fee income, other fee income was down quite a bit quarter-over-quarter, came in about 8.4 million versus 12.4 million last quarter. What was the driver of the decrease there and anything one time that you would point out?
Yeah, so a big driver of that was the evaluation on our customer derivative book, and that was driven by a lower forward curve on LIBOR. So what happens is that the customer swap assets increase and so the credit portion of that also increases. Now, that's an evaluation adjustment. I will point out that there are all costs collateralize. So it's not necessarily a risk and it's more of a function of the rate environment. You'll see some volatility in that, particularly as rates have jumped around so much quarter-over-quarter.
And Matt that's a good question, because our core kind of operating non-interest income, fees were kind of flat in general and we had a slight increase in our retail deposit fees, slightly lower swap and syndication fees. But that valuation adjustment is really what caused the delta between last quarter and this.
Got it, okay. That's all I had, I appreciate you taking my questions. Thank you.
Thank you. Have a great day, Matt.
Thank you. Our next question comes from the line of David Chiaverini with Wedbush Securities. Please proceed with your question.
Hi, good morning. Thanks for taking the question. So I wanted to touch on loan growth, it was great to see the rebound here in the second quarter and I was curious about how much of it is a function of increased loan demand from the borrowers versus you guys kind of pushing the envelope and being a bit more aggressive, given how difficult the loan growth environment is for the banking industry?
David, I have a wise ass answer to that question, but I won't do it. Well, obviously, we're not pushing the envelope on structure or price too much. I will say the pricing environment is really competitive. Talking to our Head of Commercial Banking, the structures haven't moved really far away, which is good. But all good transactions, particularly in areas like commercial real estate, asset based lending, and others are extremely competitive from a price perspective. This quarter, we're really pleased with the loan growth. And as I've said probably a million times on these quarterly calls, one quarter does not make a year. And it depends on what happens with respect to pay offs and pay downs, originations. But, I will say that I'm proud that our commercial bank over the last seven or eight years has just posted 10% organic loan growth on an annualized basis, year in and year out.
So in this quarter in particular, as I mentioned, kind of traditional middle market, which was a really good sign that includes our public sector finance and our geographic middle market offices did really well and had strong originations. Our sponsoring specialty businesses in select verticals like healthcare, healthcare technology, and technology in and of itself continue to have significant demand and did, quite frankly, throughout the pandemic, which obviously helped us continue to grow the loan. So as I've said many times, we have tons of levers to pull across our geographical regions, asset based lending, equipment finance, our specialty verticals, commercial real estate, business banking. And this quarter we just happen to see really nice originations that fit our [indiscernible] model. They have good risk adjusted returns. They fit our credit model and we remain confident that over the long term we can keep generating loan growth at the top of the market rates.
And it sounds like the pipelines are pretty strong. Can you comment on where pipelines are today versus, say, a quarter ago and well clearly a year ago the pipelines were pretty bad. But can you talk about pipelines today?
Yeah, I mean, I will say that our stated pipeline is stronger than it was last quarter and stronger than it was a year ago. Again, I'm always hesitant because it seems like in our businesses, particularly the transactional ones, prepayments can drive ultimate growth. But from an origination perspective, across all of our key businesses pipelines are up.
And then lastly, on utilization rates on revolving lines, can you discuss where the utilization rate is today versus a quarter ago?
Yeah, I will, it's stable and I think this is the first quarter-to-quarter period where we've seen significant stabilization and maybe even a tick up, but I'm not going to declare victory there. Utilization rates are still below pre-pandemic rates. I think that has to do with so much liquidity in the system as well as supply chain imbalances and people's inability to maybe build inventory in certain sectors. So if I look at ABL or across our traditional committed revolvers in commercial, I would say we've seen stabilization to a slight tick up in utilization, but still a good 5% to 10% on average below pre-pandemic levels.
That's great, that's impressive that you had such good growth with stable utilization rates. So that'll be a nice tailwind going forward. Okay, that's all I had. Thanks very much.
Thank you, David. And thanks for the comments.
Thank you. Our next question comes from line of Chris McGratty with Keefe, Bruyette & Woods. Please proceed with your question.
Hey, good morning.
Hey, Chris.
Kind of a question I asked on the Sterling call this morning was did they sold some loans that were deemed high risk into the close. Is there anything given the liquidity in the market is pretty high, is there anything on your balance sheet that might be kind of ripe for pruning before you consummate the merger?
I would say no. Strategically that there's nothing really in our book that we think we would want to sell right now. We have sold off non-performing consumer loans at times where we thought the economics were right and we didn't have to carry them, obviously, because they're a drag and a longer-term workout. But there are no pockets, Chris, in our balance sheet right now that we're eyeing loan sales in.
Okay.
I note interestingly, because I wanted to get this in that I believe this was our first net recovery quarter since before the Great Recession, which is pretty remarkable considering we just came out of a pandemic. I think it goes to show how much liquidity is in the system and what government stimulus has done. But we were even surprised by that outcome.
Okay, that's a great development. On the merger call, you were I think pretty confident about just the pro forma growth opportunities of the company. This quarter would certainly give credit to that. Is it right to assume that today versus 90 days ago that you're feeling better about, I guess, both near-term and intermediate term loan growth?
Yeah, I am feeling as confident, let's say, as confident, Chris. I'm not sure, I think our view always was and you heard us talk jointly in that call, our expectations of loan growth for 2021 individually and on a combined basis, kind of in that 4% to 5%. And we talked about the fact that the second half of this year, could be still muffled loan growth because of how much liquidity was in the system. Obviously, we reported higher loan growth after a couple of our peers. And as we head into 2022 and 2023, we've talked about 8% to 9%, 8% to 10% growth overall. And I still feel pretty confident given what's going on in the economy, absent some kind of real change with the Delta virus. I think this quarter certainly gave us additional confidence in our ability as we move forward to hit those numbers in 2022 and 2023 on a combined basis.
Okay, that's great color. I just wanted to make sure I understand the guidance for -- real quickly for the quarter, the net interest income stability comment, is that GAAP or is that excluding the triple pay?
No, that's GAAP. So 220.9, about the same range.
Okay. And I missed the PPP, what was -- in the quarter the contribution and what's left?
So PPP for the quarter contributed to net interest income about 13.5 million, which is down from 18 million in prior quarter, and we have 31 million in remaining fees. And I would say, if you look over to the next three quarters it is about a third, a third, a third that we are expecting, from a forgiveness standpoint. So about 10 million a quarter in the next three quarters.
And then lastly, the expenses and fees, the expenses that -- the pace came down quicker than I thought, is this the kind of the range that the fully optimized like 167, 168, that the 8% to 10% implies?
No, we as we showed on our slide, I mean our objective and we feel very confident is to get down to that 164 on a core expense run rate. And so there's more that that will come along off of the second quarter.
And the fees were adjusting for the mark to market or not, I'm just trying to make sure I get that right for the quarter?
The fees, I'm not sure I understand the question.
I think wasn’t your comment, stable fee income kind of going forward in the third quarter?
Yeah, yeah. Stable fee income and that's -- so I'm assuming that the forward curve in the case of credit evaluations stay about stable.
Got it. Thanks a lot for the clarification.
Thank you Chris.
Thank you. Our next question comes from line of Brock Vandervliet with UBS. Please proceed with your question.
Hey, good morning. Thanks for the question. Maybe for those of us that are a little bit less familiar with Sterling, bigger picture, I think we've all got a good sense of where your balance sheet is kind of headed here. But is there anything you would call out in terms of Sterling dynamics that in terms of runoff in certain areas that might help us kind of dimension the growth rate of the combined?
Brock first it is good to hear from you. And thanks for the question. I would say no. Strategically right now, and the work that we have done since after diligence since announcement has just confirmed this that, I think all of the business lines that Sterling operates in right now and the verticals are things that we will continue to look to grow. Over the long-term, I think, you know our management framework and me and Jack and Luis and Glenn will continue to look at risk adjusted returns. We'll look at opportunities in the marketplace. We'll look at pricing and competitive dynamics. We'll look at our position in the league tables and whether or not we can matter in certain asset classes or verticals. But right now, we're going in with probably over 20 different geographies and verticals and industries, all of which we think are appropriate from a credit risk perspective, all of which we think we can grow. And as you've heard me say, oftentimes, having more levers than fewer levers is really helpful. Because you don't have to press on credit quality, you don't have to press on the price in any one vertical, that may not be as attractive during a period of time. So I would say when you put these two banks together, at least pro forma initially will be executing in all of the verticals and geographies that are aggregated between the two banks.
Got it. Okay. And I think we've got a good sense of the loan trends. On the funding side in terms of deposits, anything you would highlight in terms of trends, average to end a period, is he liquidity wave here in the process of breaking or how would you characterize that?
We haven't seen it break yet. So, average consumer balances, average commercial balances, municipal balances, which by the way haven't even seen the peak of their tax collection season. They're all significantly above average long term and medium term average trends. So, our expectation is that we'll still be dealing with this for another couple of quarters before we see kind of full some economic activity and people start to draw down on their liquidity both individuals and businesses as they move towards more purchasing activity and more investment.
Okay, great. Thanks for the color.
Thanks, Brock.
Thank you. Our next question comes from line of Jared Shaw with Wells Fargo, please proceed with your question.
Hi, good morning. This is Timor Brazil [ph] on for Jared.
Hey Timor.
Hey guys, maybe just following up on that last question. So the loan growth you saw this quarter, are the borrowers maintaining higher levels of liquidity on your balance sheet and then borrowing in addition to that or are these borrowers that maybe don't have as significant a balance of deposits on your balance sheet? And again, just as you're thinking about the excess liquidity out there, both on your balance sheet and the borrower's balance sheet, to what extent is that 8% to 10% longer term loan growth guide as a matter of borrowers first working through their own liquidity before really getting into the borrowing base at a more normalized level?
That's a great question, Jared. And I'm not sure I can give you a really detailed response. Most of the growth or origination for instance in commercial real estate and sponsor and specialty, you don't really see that dynamic, because you've got deal transactions that are mostly, I'm going to use the little l leveraged, not regulatory leveraged, but they're not dealing with lots of liquidity. They're using debt to acquire companies. And so there's not that immediate offset, when they borrow their cash or their cash comes out or they're borrowing in lieu of deploying their cash. I think it's more strategic deployment of debt capital. That does happen in some of our business banking and commercial cases where you're seeing them have lower utilization, higher cash balances, and then as you see them start to draw down on their lines of credit, you'll start to see kind of the dynamic interplay. When they get lower balances, they'll draw higher on their capital. But I don't think, what we've said all along is our hypothesis exactly what you just said, which is there's going to be a period of time where loan growth demand will not return to its fulsome self, until you start to see some of the companies and borrowers draw down on their liquidity. But I would say this quarter, we saw kind of an offsetting activities in deposit account balances and draw downs on lines or the deployment of term loans.
Okay, that's good color. And then maybe looking at the Sterling integration and how that process is moving along. As you're getting deeper into the integration process and closer to closing the transaction. I guess, how are you feeling about the cost saves opportunity, I think you'd broken it down based on technology back office and kind of corporate facilities in the past. Is that a) seemed still realistic, b) is there potential to upsize that, and c) I guess, again maybe going back to an earlier question, is there an opportunity to maybe do something on the balance sheet in advance of the deal whether it's on the liquidity side or whether it's getting deeper into products prior to a deal close?
Yeah, I would say answering your latter question first. I wouldn't comment on any kind of activity, balance sheet activity or product moves between now and close. And I would stick with our initial guidance in terms of expense. I think both Jack and I mentioned that over the long term I think we both think that there are continued opportunities to leverage like functions and they continue to get more efficient. But I can tell you, the integration is going well and kind of the budgets that we're handing out for people to hit are right in line with what we talked to the markets about on April 19th. And, I think that's the appropriate level of efficiency and the appropriate cost saves to be going into this combination together. And remember that that cost save amount that we talked about is a net amount, which does give us some investment flexibility as we put the two banks together.
Okay, and then just last question for me, modeling question, the 18.2 million of the strategic initiative and merger related adjustments, can you just provide the line items that that's housing?
So it's primarily in professional fees. Timor, it is Glenn, that is all primarily in professional fees. I think the piece that's relative to the initiative is more spread out in other and lease line, but it's smaller amounts. So the biggest part of that 18 million is in professional fees.
Okay, got it. Thank you. Nice quarter.
Sure. Thank you.
Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Ciulla for any final comments.
Thank you very much Melissa. We appreciate everyone joining today. Have a great rest of the summer.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.