Webster Financial Corporation (WBS) Q4 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Webster Financial Corporation Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] 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. Mrs. Manginelli, please go ahead.

Thank you, Daryl. Good morning, and welcome. Earlier this morning, we issued a press release to announce Webster Financial Corporation's fourth quarter 2021 earnings. On the call today, we will provide some brief comments regarding the company's fourth 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 the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. I'll now introduce Webster's Chairman and CEO, John Ciulla.

Thanks, Kristen. Good morning, and thank you for joining Webster's fourth quarter earnings call. CFO, Glenn MacInnes and I are here in snowy Waterbury to review our performance for the quarter and full year 2021. I will also provide a status update on our strategic initiatives and our impending merger with Sterling, after which Glenn and I will take your questions. 2021 was a transformational year for Webster. We delivered strong financial and strategic performance through a dynamic economic environment while navigating the challenges of the continued pandemic. As we move ahead in 2022, we continue to see robust economic activity across our expanding footprint, including strengthening confidence from our business and consumer clients with respect to demand for products and services and lending activity has continued to accelerate. The outlook for the interest rate environment is looking more promising, a macro trend for which we are very well positioned to benefit. Our credit metrics also reflect both the solid economic backdrop and the quality of our risk management process. Overall, despite the continued uncertainty surrounding the ongoing impact of the pandemic, we are optimistic about the trajectory of our business as we head into 2022. With respect to our internal transformational project, we continue to make significant progress on revenue enhancements and operational efficiencies throughout the organization, which will complement the merger as we integrate the 2 companies. On the revenue side, we enhanced digital customer experiences across all business lines through targeted technology investments. While expenses fell modestly above our fourth quarter 2021 target, the delta was driven largely by incentive compensation accruals, reflecting strong production by our bankers. When compared with 4Q 2020, we made significant progress in reducing core compensation and occupancy expense. In fact, year-over-year, we reduced our real estate square footage by more than 15% and materially and permanently reduced our overall operating cost structure. We received federal reserve approval for our merger with Sterling on December 17, and we plan to close on February 1. Our integration planning process is complete, and we are ready to bring these 2 strong organizations together. I'll begin the financial report on Slide 2 with an overview of the quarter, which reflects our strong performance. Our adjusted earnings per share in Q4 were $1.31, up from $0.99 a year ago. Our fourth quarter performance includes $13.7 million of net pretax charges related to the merger and our strategic initiatives. Our fourth quarter adjusted return on common equity was 14.6% and the adjusted return on tangible common equity was 17.7%. Excluding PPP, linked quarter loan balances grew by 16% annualized. Tangible common equity grew by 8% and is $208 million higher than a year ago. Total adjusted revenue in Q4 was 6.5% higher than a year ago, while adjusted expenses decreased 3%, demonstrating strong operating leverage. Our efficiency ratio improved to 55%, a decrease of 542 basis points from a year ago. Our provision was a $15 million benefit as both our credit metrics and the forecast for economic conditions continue to improve. The provision release was net of a $12 million reserve build tied to loan growth. Underlying asset quality is solid, NPLs, net charge-offs and commercial classified loans all as a percentage of portfolio improved from a year ago. I'm now on Slide 3. Excluding PPP, total loans grew over 8% from a year ago, led by record commercial loan growth of $1.3 billion or nearly 10%. Commercial Banking, again increased loan originations accelerating to $1.8 billion, up solidly from a year ago, driven by growth in commercial real estate, sponsor and specialty, and business banking verticals. Commercial loan fundings of $1.3 billion were up 50% from a year ago, reflecting the expertise of our bankers and improving client loan demand. Consumer loans grew 5.2% or $351 million compared to the prior year, driven by robust residential mortgage activity and our late 2020 decision to balance sheet conforming production. I'm now on Slide 4. Deposits grew 9.2% year-over-year with growth across every business line. Core deposits grew by $3.2 billion and represent 94% of total deposits compared to 91% a year ago as CDs decreased $690 million from a year ago. And our deposit costs continue to decline, and our total cost in the quarter was 5 basis points for all deposits. On Slide 5, you'll see the full year 2021 financial highlights. On a full year GAAP basis, our PPNR improved to $479 million from $418 million a year ago. Our full year EPS of $4.42 is a record for Webster, as our net income of $399 million and tangible book value per share of $3.22. We were able to achieve this strong year-over-year growth even as we reduced core operating expenses and our real estate footprint, as I mentioned earlier. Slide 6 provides an overview of the transaction and integration timeline for our merger with Sterling. We are excited to begin operating as a combined company as we approach the legal merger date. We have a detailed conversion and integration plan in place, and we are positioned to begin operating as one organization on February 1. We've begun welcoming clients to the new Webster and plan to convert all legacy Sterling customers to the Webster brand immediately upon close. With a primary focus on optimizing customer experience during the integration, we plan to fully consolidate the operations over the next 18 months. With that, I'll now turn the call over to Glenn for a more detailed financial review.

Thanks, John, and good morning, everyone. We reported solid results in the quarter, evidenced by strong loan growth, favorable credit performance and continued execution on our strategic and merger initiatives. I'll begin with our average balance sheet on Slide 7. Average securities increased $1.4 billion linked quarter and represented 29% of average total assets. During the quarter, we purchased approximately $1.6 billion in securities with a weighted average yield of 1.44% and a duration of 4.1 years. Securities called, matured or paid down totaled approximately $500 million with a yield of 2.04%. Average cash balances held at the Fed totaled $1.2 billion, a decrease of $1.1 billion linked quarter as we deployed liquidity into loan growth and the securities portfolio. Average loans increased $364 million or 1.7% linked quarter, primarily driven by increases in C&I, commercial real estate and residential mortgages. This was partially offset by PPP loan forgiveness and lower consumer loan balances. During the quarter, forgiveness on PPP loans totaled $183 million, and outstanding balances at year-end were $215 million. In Q4, we recognized $7.5 million of PPP deferred fee accretion, which was down from $16 million prior quarter. Remaining deferred PPP fees totaled $8 million. Excluding PPP, average loans grew $677 million or 3.2%. Average commercial loans grew $454 million or 3.2% while residential mortgage loans increased $273 million or 5.4%. Average deposits grew $270 million or 0.9% linked quarter. The increase was driven by continued growth in commercial transactional deposits, which were partially offset by a seasonal decline in public funds and a reduction in higher-cost CDs. To give you some business line trends, on a period-end basis, commercial banking deposits were up 18% from a year ago, while consumer and small business grew 5.3% and 14.3%, respectively. HSA deposits grew 4% year-over-year or 7% on a core basis, and total HSA footings grew 11.5% year-over-year. Average borrowings were effectively flat to Q3 and down $750 million from prior year. Loan-to-deposit ratio was 74.6% on December 31. The common equity Tier 1 ratio decreased 5 basis points linked quarter to 11.72%. The tangible common equity ratio increased 26 basis points to 7.97%, and tangible book value grew 2% linked quarter and 7.8% from prior year. Slide 8 highlights our GAAP performance and adjustments to reported income available to common. During the quarter, we recognized a net of $10 million after-tax charges related to our merger and strategic initiatives. On an adjusted basis, income available to common was $119 million or $1.31 per share resulting in a 14.6% return on average common equity and a 17.7% return on tangible common equity. On Slide 9, we provide our reported to adjusted income statement. Net interest income decreased by $3 million linked quarter, driven by lower PPP fee accretion of $8.5 million and a lower yield on the securities portfolio, partially offset by continued loan growth. Net interest margin was 2.73%, down 7 basis points linked quarter. This was a net result of a 10 basis point reduction from lower PPP fee accretion offset by a 3 basis point improvement in our core NIM. As compared to prior year, net interest income increased $6 million driven by strong loan growth and reduced funding costs. Noninterest income increased $6.3 million linked quarter primarily driven by higher realized gains and fair value adjustments on direct investments, BOLI income and a gain on the sale of a commercial loan. Compared to prior year, noninterest income grew $13.4 million. This largely reflects an increase of $8.9 million related to the factors highlighted in the quarter-over-quarter variance as well as an increase in deposit service and wealth management fees. Adjusted noninterest expense increased $1.8 million from prior quarter, reflective of seasonal increases in temporary staffing and medical expenses. Versus prior year, noninterest expense declined $5 million due to our previously announced efficiency initiatives, resulting in lower occupancy costs, compensation and other expenses, which were partially offset by an increase in performance-based compensation. Pre-provision net revenue was $141 million in Q4. This compares to $139 million in Q3 and $116 million in prior year. Our loan loss provision in the quarter was a net benefit of $15 million and the adjusted tax rate was 22.2%, an increase of 158 basis points linked quarter. The result is an adjusted net income of $119 million or $1.31 per share, an increase of $0.23 over the prior quarter. On Slide 10, we have provided an update on our strategic initiatives. We are pleased to have achieved $10 million in quarterly run rate expense savings, which was driven by a reduction of approximately 15% in both FTE and occupancy square footage. In the fourth quarter, this was partially offset by $7 million in expenses we do not anticipate in our run rate going forward. The increase was primarily tied to performance-based incentive accruals driven by loan and revenue growth, credit quality and progress on our strategic initiatives. We also delivered on other initiatives in technology, including a new digital onboarding experience for consumers, along with various initiatives to support growth in the commercial bank. In the second quarter, we will launch a new digital experience for employers of our HSA business. We will continue to capitalize on strategic initiatives as we begin our integration with Sterling. Turning to Slide 11. I'll review the results of our fourth quarter allowance for loan loss under CECL. In the quarter, we reported a net provision benefit of $15 million. Our allowance of $301 million was down $14 million, the net result of adding $12 million in reserves for loan growth, which was more than offset by the benefits of continued improvement in asset quality trends and our macroeconomic outlook. The allowance coverage ratio, excluding PPP loans, was 1.37%. Slide 12 highlights our key asset quality metrics reflecting strong credit quality performance trends. Nonperforming loans in the upper left increased $9 million from Q3. The increases were concentrated in C&I with partial offsets in commercial real estate and residential mortgage. NPLs as a percent of total loans are 49 basis points, down from 78 basis points a year ago. In terms of net charge-offs, in the upper right, we realized a $1.2 million net recovery in the quarter. For the full year, we recorded $4 million in net charge-offs, which is its lowest full year level since 2005. Commercial classified loans in the lower left decreased $90 million from Q3 and represented 186 basis points of total commercial loans. Slide 13 highlights our strong capital levels. Regulatory capital ratios exceed well-capitalized levels by substantial amounts. Our common equity Tier 1 ratio of 11.72% exceeds well capitalized levels by more than $1.2 billion. Likewise our Tier 1 risk-based capital of 12.32% exceeds well capitalized levels by $1 billion. With that, I'll turn things back over to John for closing remarks.

Thanks, Glenn. It's been a uniquely eventful year here at Webster. In addition to executing through a year impacted by the pandemic, we delivered on the internal initiatives we outlined a year ago, while also announcing our merger with Sterling. Throughout it all, we managed to generate strong performance broadly and particularly from a loan growth, asset quality and customer service perspective. I want to give a special thank you to all our bankers for continuing to perform at such a high level during a period of challenge and rapid change. Throughout the year, we've been recognized by a number of third parties for outstanding performance, market-leading customer satisfaction and experience and for being a great place to work. Today, I can share that for 2021, Webster was once again the top SBA lender by dollar volume in New England, reflecting the work of our outstanding bankers. Finally, I again want to express how enthusiastic I am about the pending close of our merger. This is a transformative transaction that will greatly benefit both banks' clients, colleagues, communities and shareholders. We are creating a unique financial institution, a bank with a differentiated funding base that includes HSA Bank and our combined consumer and commercial banking businesses. We have a broad range of regional and national asset generation capabilities, particularly through a growing commercial banking franchise with deep industry specialization and a growing geographic footprint. We have a highly dense and economically robust core footprint. We have the ability to draw on outstanding talent from within both organizations, and we are the optimal size to be nimble and responsive to our clients while having the scale, sophistication and balance sheet to meet all of our clients' growing needs. With that, Daryl, Glenn and I are prepared to take questions.

[Operator Instructions] Our first question has come from the line of Chris McGratty with KBW.

John, maybe I'll ask the question I asked when the merger was announced and askked about the pro forma growth rate of the company. Clearly, your numbers are heading in the right direction, and Sterling are too a little bit more bumpy. Can you just update us on kind of how we should be thinking about the combined organic growth in 2022?

Sure. And I'll throw the general thought out there that with respect to all of the guidance we put out in on the 19th of April, it seems like a long time ago because it was, that we're kind of still sticking to those assumptions as we look at the marketplace now. So obviously, we did have a really strong loan growth in the fourth quarter. We had record originations. We also had record payoffs. Sterling had good solid core loan growth, a couple of mortgage warehouse and a couple of other areas where a little bit more volatile. But I still think we think 8% to 10% annual total loan growth for the next couple of years is doable, is our target, taking into consideration a more competitive environment, but also a continually improving economic environment with better loan demand, more business confidence, more consumer confidence. So from an asset growth perspective, I still think we dial into 8% to 10% net growth expectations as a combined organization over the next couple of years.

That's great. And then my follow-up would be, given the capital position that you're in, the strong capital position, how do I think about potentially getting to 8% to 10% versus using a buyback that you've talked about in the past?

Yes. I mean I think with respect to capital, all of the executives on both sides that are involved are in alignment. We have definitely excess capital, some $600 million to $750 million depending on kind of onetime expenses. We modeled in a $400 million share buyback because we wanted to sort of show usage of capital in our original model. But as we do all the time, we kind of prioritize deploying capital first to organic growth, portfolio acquisitions, horizontal products for some of our differentiated business lines. Obviously, we then look at our payout ratio, our dividend and depending on market conditions, we have opportunistic opportunity to buy back shares. So it's still on the table. We're looking at it, but I think we're going to be kind of disciplined as we always are and make the right economic decisions and be opportunistic, Chris, with respect to share buybacks.

Okay. So still on the table, but perhaps maybe not a full 400 given the momentum in growth. Is that a fair conclusion?

Sure.

Our next questions come from the line of Brock Vandervliet with UBS. .

Just following up on the merger. One, if you could just review the size of the mortgage warehouse portfolio on a pro forma basis. Second, how are you looking at that as a potential headwind, especially with rates up pretty smartly here, having choked off a lot of potential refi activity in mortgage looking like a smaller driver? In addition, as we think about loan growth going forward, are you likely to continue to portfolio those agency loans as you have been? Or would you look to sell more of those?

Yes. I'll give you the general thing while Glenn looks up the number on the mortgage warehouse. So we've been really consistent. And what we're going to do is we're going to continue the activities in both organizations on February 1 kind of full speed. We love the levers. There aren't any asset classes or business lines right now that we think are either too volatile, too credit risky, don't make sense, and we love having expanded geographies and a ton of probably more than 20 separate commercial and consumer lending activities to draw on, which means we don't have to throw the bomb or take incremental risk or give in to bad pricing conditions in any one of them. So what I would say is, first, as it relates to mortgage warehouse, it is dependent on what the market conditions are, we'll make the right decisions in terms of putting down the accelerator or backing off, depending on the risk return metrics and where we are, which really applies, Brock, to every single one of the activities we're involved in. Having all of that diversification and geographic diversification is what gives us confidence in being able to grow loans at 8% to 10% in areas that have good risk return metrics. And what we've said in all of our non-deal roadshows and at the beginning is then over the course of the next, say, 12 to 18 months, as we always do, we'll be looking at capital deployment and saying, "Hey, are some of these business lines not as strategic or are the market dynamics not really favorable for us or are we too small to really make a difference." And so we'll obviously redeploy capital into those areas where we can generate the most economic profit, generate the most growth. So I don't have any concern or view or worry about any of the asset classes. I don't think that something like mortgage warehouse on the size balance sheet we have pro forma will stop us from getting to our net loan growth numbers even if things aren't kind of cranking there. So that's kind of where we sit and we'll make the appropriate capital allocation decisions further down the road.

Got it. Okay. I appreciate the color. And just as a quick follow-up. Has there been any lift in the C&I utilization rate yet? Or is that still kind of stuck where it's been?

There has been, as a matter of fact, I was just reviewing that. So I know ABL for us, which is a relatively, I'd say, small, but it's not a driver of overall loan growth, but it had really a good increase in utilization, both linked quarter and significantly from last year, which was pretty much a low point back up to around 50%. And I think, which portends well for general asset conversion cycles, working capital usage, building of inventory. The rest of our commercial utilization was up slightly. So I would say overall, C&I line utilization is up materially from the low a year ago, not quite back to pre-pandemic utilization levels.

Our next questions come from the line of Laurie Hunsicker with Compass Point.

Just sticking with the theme of looking at you guys’ pro forma, can you help us think about what your margin looks like if we look at it ex PPP plus Sterling layering in the debt restructure and any other restructuring that you're doing? How should we be thinking about that?

So Laurie, it's Glenn. Let me give you some context to that. And so I think when we look at our margin, we're probably at a starting point of about 2.95% on NIM on a combined basis, if I look at that sort of for the fourth quarter anyway. We are still working through -- we're still working through most of the assumptions on accretion and marks and things like that. But I can tell you that we're generally in line with the disclosures that we've made on the announcement. We will give you an update on that during our Q1 earnings call. But with respect to looking out in asset sensitivity, I mean, one of the things that we are looking at is you know that both organizations are very asset-sensitive. And if we look at this and we say we're forecasting 3 rate increases in 2022, one in May, one in July and one in December, so you don't really get the full year benefit of that one in December. But the impact, just to give you a sense of that on net interest income, is about 3% in 2022. On a full year basis, meaning getting the benefit of 3 rate hikes on an annual basis, it's probably double -- a little more than double that. And the dynamic there is, of course, that we have our loan book, which is about 60-plus percent floating and periodic. And so there are some floors against that. But generally, that's what's driving the asset sensitivity. The other assumption, of course, is on the deposit beta. And we're currently at about 11%, 12% beta for the first 50 basis point move. And then it probably goes up to closer to like 20%, at least I said we're forecasting for the third -- for the third move. So I hope that gives you some sense of how we're thinking about it from an asset sensitivity standpoint.

Yes. Very, very helpful. Just a quick question. I know you said you were still working through it, but anything that you can give us in terms of accretion income what that number is going to look like either on your margin, either in dollars.

No, we're working through the PCD, non-PCD mix as we speak, as we get closer to legal day 1. So we'll give you an update on that as we get to Q1 earnings.

Okay. And then pro forma intangibles, do you have a refresh on what that's going to look like?

Same thing. So it's all related as we make our marks and stuff like that.

Got it. Okay. And then just on credit, just hoping that you can comment a little bit on both the commercial loans, your C&I nonperformers up pretty sharply in the quarter. And then from the standpoint of STL, they had another pre-loan sale. It looks like the charge-off rate there was 9.5%. Is that just sort of fourth quarter cleanup in terms of how STL is looking at the CRE. They've obviously been selling some of their special mention and substandard or how are you approaching that? And just anything you can give us around your C&I book?

Sure, Laurie. No, I think your characterization of the asset sales at Sterling is right. It's sort of clean up and opportunistic without taking significant loss in nonstrategic assets, which I think is prudent. For us, like, we have 2 commercial loans that ended up going NPL on a huge, obviously, $14 billion loan portfolio. So we don't see anything in there that's significant. And obviously, we have adequate reserves. And we've been really pleased, quite frankly, our NPLs came down significantly because we sold a bunch of consumer kind of older NPL consumer loans actually, and we were able to get a recovery at the price we sold them for. So we don't think that this tick-up is material. We're not seeing any negative trending. Our overall risk rating and weighted average risk rating in the portfolio is really strong. So I've said in many forms, I think it's almost silly how good the asset quality is. But obviously, we're being very careful thinking about whether in any sectors or industries, there's any kind of structural weakness as we come, hopefully, out of the pandemic with people having operated in this environment. But we really see strength in C&I. I think they see it on the other side. We're focused on office, the long term, how people work and office. But I think everybody is on both sides, Sterling and Webster have very low loan to values and conservative underwriting. So we feel really good about C&I and CRE across the board in both banks.

Next questions come from the line of Matthew Breese with Stephens.

On Page 6 of the presentation, you mentioned that over the next 18 months, you intend to unlock revenue synergies from the Sterling deal. You also mentioned the consolidation of facilities. I was just hoping you could flesh those 2 items out a little bit and what are the P&L and balance sheet impacts that you're alluding to?

Matt, I think it's a bit -- on the cost side, Glenn can walk you through kind of the high level. We're still working through quantifying the revenue synergies as we bring the 2 banks together, and we're going to give you a lot more detail and a lot more guidance for over the next 12 months in the first quarter combined earnings call. So I'll leave it there. I've mentioned things like larger hold levels. Obviously, that's something that we're already benefiting from, if you will, with respect to our pipeline and our opportunities. We've got more fee revenue opportunities across wealth, and we've always seen some momentum there. We've got great cross-sell opportunities with HSA, both selling on our larger commercial companies -- customers across both banks to HSA and HSA helping us with others. We're able to invest, and we've got a pretty good road map on digital investment on banking as a service, some of the stuff you saw Sterling do with respect to blockchain. There's just a lot of exciting things going on, and we're quantifying the economic benefits. None of that is kind of in the -- as we said, in the April 19, 2021 forward forecast. So we'll be able to provide you kind of more economic information around those activities in the first quarter.

Understood. Okay.

And Matt, I might be able to give you a little more context on how we're thinking of this. So we look at our core operating expense for both organizations in the fourth quarter, and they combine to about $287 million. So that's basically our starting point based on the fourth quarter. And so you can sort of annualize that and say that, that's sort of the core base. And then as you know, at the time of the announcement, we said -- we thought we could achieve $120 million or 10% for the combined organization. And I think we continue to believe that, that's achievable over the 2-year period. So that -- over 2 years, you'd expect that to come out. We also said at the time we announced, we thought we’d get about 75% of that or $90 million in the first full calendar year. And at the time, we thought we were going to close on October 1, and that's now sort of moved to February 1. And so that slide out a little at least from a calendar year standpoint. And so now we estimate in 2022, we'll probably get about $60 million of that or 50%. And the remaining 50%, again, we feel really good about getting in 2023. So you can sort of take those 2 sort of data points, the core operating expense and what our target is for 2022 as well as 2023, and sort of get a sense of how the expenses are going to roll out. The only thing I would say is there's going to be seasonality in the quarterly expense number. So you're going to see that. You always see it in the first quarter where you see higher FICO taxes and things like that. And then in the fourth quarter, you always see us sort of ramping up a little on temporary expense for HSA. And then the other thing I would point out is that none of these include any impact of inflation to the core base. And so that's something that we're keenly taking a look at. And then, of course, as Laurie asked the question, but things like intangible CDIs, PCD, non-PCD, that will all have an impact on earnings as well. And then lastly, any additional investments that we make in the business, we decide midyear to do a lift-out or something like that. And there's nothing on the radar. But if we decide to do something like that, of course, you could expect the expenses to reflect that. At the end of the day, we'll be able to provide a lot more clarity on our first quarter earnings call and how we're thinking about the rest of the year as well as 2023.

Yes. And to put a finer point, Glenn mentioned wage inflation, other inflationary pressures on costs, I mean I think we would -- wouldn't be genuine if we didn't think that, that could be a headwind. But I will say that to the extent that also results in more interest rate increases over time, obviously, will benefit on the top line. So with respect to delivering the ROATC targets, the ROA targets, loan growth targets, we feel pretty confident that regardless of the environment, we'll be able to deliver on those.

Understood. Okay. Next one for me is just a 2-parter on HSA. The first one is just any sort of color on first quarter account opening, just given where we are in enrollment season. And then the second part is just as we rewind the tape a little bit and think about Webster progressing through the last rate hiking cycle, for HSA, I also recall it being a time where you're heavily investing in the infrastructure of that business. So as we think about the next rate hiking cycle for HSA, could the profitability of the underlying subsidiary be that much better or exceed last cycle because so much of the infrastructure has already been built?

Yes. I mean, I'll take the second one first. I think the answer is yes. We should have more operating leverage as we move forward. I think our operations are more resilient. We've invested in kind of infrastructure. As Glenn said, in the second quarter, we're rolling out kind of a more bespoke customer experience through this portal we've been working on. So I do think while there'll be kind of variable costs with respect to growth, if there are opportunities that the -- we should be able to capture more of the value as interest rates increase. As it relates to this enrollment season, it's too early to tell. Our current reports are that we're looking similar to last year with respect to new account growth. And that similar kind of dynamics where we're continuing to do better in bringing in new employers, direct to employer and you know that's been an emphasis for us over the last say, 3 to 5 years, and that's really satisfying for us. What's interesting is we still are seeing a bit of a muted environment in terms of new account enrollments with existing employers. And so that probably is a result of the continued muted employment growth and not a lot of hiring going on across our employer customer base. Because if you recall, the convention used to be year in and year out, some 75% to 80% of our new accounts actually came from existing partners and existing customers. That number is going down a little bit even as we're bringing in more employers. So I think that means we'll have more opportunity, hopefully, if we get a more robust hiring environment, to have some more organic account growth. But we still think it's about kind of flat to last year when we look at January over January. But obviously, as you know, we only have a little bit of insight into the full enrollment period in the quarter right now.

Understood. Okay. Last one for me. Earlier this month, Sterling put out a press release indicating they would join the USDF Consortium. You had mentioned blockchain as a potential catalyst in the future. Where this has been most effective, real-time payments has been when it's applied to certain ecosystems, and I couldn't help but think that with HSA, you have a health care-related ecosystem where real-time payments could be impactful. So one, maybe just curious your thoughts on real-time blockchain-enabled payments bank to bank. And secondly, could this be something that gives you a leg up on the competition HSA-wise? That's all I had.

Yes. Great question and a smart one, Matt. So I don't want to get too far ahead of ourselves. And obviously, we operate both of these banks completely separately until we get to February 1, but we're obviously intimately aware of and excited about the relationships that the Sterling folks have gone into and sort of be an effective way to be -- effective economic way to be a first mover to learn a lot. And there are tons of use cases with respect to the USDF announcement, you think about mortgage lending, consumer lending, you think about real-time 24-hour cheap payments, you think about information with respect to BSA/AML. And also, to your point, a fine point, we do think there are opportunities given where we sit in the health care ecosystem to deploy this technology to differentiate our business there. So our expectations now are we've got a lot of smart people thinking about this. This gives us a front row seat. I think there will be use cases that will actually be deployed in 2022. We don't have any economics built in with respect to our 2022 forecast because we want to be conservative. But one of the more exciting opportunities is kind of in the health care payment space because we're already kind of nestled right in there. So the answer is yes.

Our next questions come from the line of Casey Haire with Jefferies.

I wanted to touch on capital. So you guys -- you and Sterling both above 11% CET1. So legal day 1, you guys are going to be in great shape capital-wise. Could you just give us a refresh as to what ratio you -- is most important to you and what you'll manage to pro forma?

Yes, sure. Casey, it's Glenn. And I think at the time of the announcement, we said we're looking at common equity Tier 1, and we were looking at a ratio -- a target ratio over the course of 2 years to be closer to 10.5%. And if you look at where we are today pro forma, that implies probably excess capital about $750 million to your point. Now there will be some onetime charges against that. But that's where we are.

And Casey, I answered as of -- the first question out of the gate too, and I don't know if you heard. I think we had put in $400 million in stock buybacks into our model because we wanted to model an effective use of capital. And as we've said in every non-deal roadshow throughout and in our last earnings call, we're going to continue to apply a disciplined approach to capital management here, meaning first prize is deploy that capital into organic asset growth, complementary products for our differentiated businesses, portfolio purchases. And then obviously, we look at market conditions, where our capital is and think about opportunities on the dividend and stock repurchase and we'll be opportunistic. It's clearly on the table. We definitely have excess capital, but we're going to take the same disciplined approach to making the right economic decision given market conditions at the time.

Okay. Understood. And apologies if I missed this, but the securities portfolio stepped up nicely in the fourth quarter. I mean, you guys had outlined that. But can you just give us an update as to what's the appetite to continue to grow that? And then where our new money yields today versus that [1.44] level in the fourth quarter?

Yes. So we're at 29%. And I think at our all-time high going back a couple of years ago, we're a size 32%, 33% of total assets. And so I don't see it -- and particularly with the consolidation, it will come back down to the low 20s. One of the things we will do, Casey, is, for the most part, the Sterling portfolio will be booked as AFS. And so that will give us -- that will sort of flip it, we will be 60-40, say, AFS, and that will give us optionality on the investment portfolio as well. But we took those actions given our excess liquidity, we drew down the excess liquidity that we're holding at the Fed about $1.1 billion. And we thought that was prudent. We still have significant cash flow. If you look at our investment portfolio, it's about $500 million a quarter and Sterling’s is, say, $250 million. So we still have significant cash flow on both sides there, and then you have the loan cash flow on top of it. So I think we did this. We took a little more duration on the balance sheet, you say, 4.1 years on what we purchased, but we also preserved a lot of optionality going forward.

Okay. Great. And just last for me on the new money loan yields, I know -- I haven't stripped out the PPP impact. But obviously, that was lower. But 343 overall, where are they today? And specifically, the commercial at 412, where are those coming in?

In our yields, obviously, we've got significant variability in the yields depending on the mix of loans. I would say, let me start from a credit spread perspective, we're continuing to see pretty competitive market. And so I'd say year-over-year when we look at the origination spreads, they're down marginally. But we have, from a coupon perspective, you think about -- I'll give you in the quarter, our sponsor in specialty business at like a 4.45% and our commercial real estate institutional grade more closer to 2%, 2.25%. So we think, obviously, with a significant percentage of our C&I and commercial real estate loans floating, we get some rate increases, we could see a material lift in yield and obviously, a delay in increases in our deposit cost is what we're thinking. But I would say loan yields are -- they were 3.24% on origination in commercial on a blended basis, which is driven, again, largely by where those originations come from.

There are no further questions at this time. I would like to turn the call back over to John Ciulla for any closing comments.

Thank you very much, Daryl. I appreciate everybody's interest in the company and participation this morning on the call. I know there are a lot of announcements today. And I can just reiterate, we are so excited to be putting these 2 great banks together and great people on both sides and really excited about the future. Thanks for joining us.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.