Q4 2023 M&T Bank Corp Earnings Call
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Welcome to the image you bank fourth quarter and full year 2023 earnings conference call.
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Please be advised that today's conference is being recorded and I would now like to hand, the conference over to Brian Clark head of market and Investor Relations. Please go ahead.
Yeah.
Brian Clark: Thank you Michael and good morning, I'd like to thank everyone for participating in <unk> fourth quarter 2023 earnings conference call, both by telephone and through the webcast.
Brian Clark: If you have not read the earnings release, we issued this morning.
Brian Clark: They access it along.
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Brian Clark: The Ww MTBE dot com.
Brian Clark: Once there you can click on the Investor Relations link and then on the events and presentations link.
Speaker Change: Also before we start I'd like to mention that today's presentation may contain forward looking information.
Speaker Change: Passionary statements about this information are included in today's earnings release materials.
Speaker Change: And in the Investor presentation.
Speaker Change: Well as our SEC filings and other investor materials.
Speaker Change: The presentation also includes non-GAAP financial measures as identified any earnings release and Investor presentation.
Speaker Change: The appropriate reconciliation to GAAP are included in the appendix.
Speaker Change: Joining me on the call this morning.
Speaker Change: <unk> senior executive Vice President and CFO, Daryl Bible now I'd like to turn the call over to Darryl.
Daryl N. Bible: Thank you, Brian and good morning, everyone.
Daryl N. Bible: As you will hear today on the call 2023 work a banner year for <unk> Bank.
Daryl N. Bible: On slide three I want to acknowledge that the keys to our success.
Daryl N. Bible: What continues to drive performance.
Daryl N. Bible: Okay.
Daryl N. Bible: Mission and operating principles are focused on making a difference in people's lives and creating a positive impact in the communities. We serve is core to how we operate it.
Daryl N. Bible: It is evident in how we show up for our communities and our moments of neat why can Vermont, and Lewiston, Maine, where we continue to help those impacted by tragedies.
Daryl N. Bible: And it's why we are committed to supporting small businesses that are the backbone of local economies.
Daryl N. Bible: And it dictates, how our charitable foundation, which celebrated its <unk> anniversary last year continues to uplift our partners.
Daryl N. Bible: It all down alongside our daily work is helping our customers achieve their financial goals.
Daryl N. Bible: Turning to slide four we are excited to see how deeply we have embedded sustainability across the bank and into our products and services.
Daryl N. Bible: Look forward to sharing more information on the impact of our businesses. When we release, our 2023 sustainability report in the spring.
Now, let's turn to slide six.
We reflect on 2023, there are several successes to highlight.
Daryl N. Bible: We continue to realize the benefits from the People's United franchise and are pleased with the growth in new England with MLP, finishing as top SBA lender in Connecticut.
Daryl N. Bible: C&I loans grew by over $5 billion or 11% in 2023 aided by the growth in several specialty processes brought over by People's United.
Daryl N. Bible: S C&I growth outpaced the reduction in CRE as we can.
Daryl N. Bible: Continue to optimize the way we serve these customers in the most capital efficient manner possible.
Daryl N. Bible: At the end of 2023, CRE loans represented approximately 25% of total loans.
Daryl N. Bible: Our capital remains strong with a CET one ratio near 11%.
Daryl N. Bible: We continue to leverage our strong capital and liquidity levels to grow new customer accounts and relationships.
Daryl N. Bible: We also reduced asset sensitivity in 2023, while protecting shareholder capital and value.
Daryl N. Bible: However, our work is not done.
Daryl N. Bible: We continue to recognize the value created by the merger with People's United While also bringing more capital efficient.
Daryl N. Bible: Neutral balance sheet that will produce stable and predictable revenue and earnings over the long term now.
Daryl N. Bible: Now I'd like to review the highlights for the full year results for the full year 2023 were strong we.
We generated positive operating leverage solid loan growth improved expense control through the year and growth in EPS and strong returns.
Daryl N. Bible: Our pre tax pre provision revenue or <unk> was $4 2 billion up 22% from 2022, and we generated three 9% positive operating leverage.
Daryl N. Bible: Net charge offs were 33 basis points in line with our expectations and long term average.
Daryl N. Bible: GAAP net income was $2 7 billion.
Daryl N. Bible: Diluted earnings per share were $15 79.
Daryl N. Bible: Up 37% from the prior year.
Daryl N. Bible: As a reminder, 22 results included merger charges and gain on sale of our insurance business and a sizable contribution to our charitable foundation. While 2023 included a gain on sale of the six vessels and the FDIC special assessment.
If you exclude these items adjusted diluted earnings per share were $15.72 during 2023.
Daryl N. Bible: Up 11% compared to 2022.
Daryl N. Bible: Our adjusted returns were also very strong with return on assets of 133% and return on common equity of 11%.
Daryl N. Bible: Turning to slide seven which shows the results of the fourth quarter.
Daryl N. Bible: Were also strong P P and already client modestly from the linked quarter to just over $1 billion.
Daryl N. Bible: C&I and consumer loan growth was strong.
Daryl N. Bible: Expense control was evident as adjusted expenses declined 2% from the linked quarter and were down each consecutive quarter in 2023.
Daryl N. Bible: Diluted GAAP earnings per common share were $2 74 for the fourth quarter.
Daryl N. Bible: If you exclude the FDIC special assessment adjusted diluted earnings per common share were $3.62.
Daryl N. Bible: On an adjusted basis Mmc's fourth quarter results produced an ROI.
Daryl N. Bible: And <unk> of 1.19% and nine 8% respectively.
Next we will look a little deeper into the underlying trends that generated our fourth quarter results. Please turn to slide eight.
Daryl N. Bible: Taxable equivalent net interest income was $1 $7 billion in the fourth quarter down 3% from linked quarter. This decline was driven by higher interest rates, our customer deposit funding and change the change in deposit mix, partially offset by higher interest rates on earning assets.
Daryl N. Bible: Net interest margin was 361% down 18 basis points from the linked quarter.
Daryl N. Bible: The primary drivers of the decrease to the margin more favorable deposit mix shift contributing a negative seven basis points.
Daryl N. Bible: The impact of higher rates on customer deposit funding net of the benefit from higher rates on earning assets contributing negative five basis points.
Daryl N. Bible: And a negative six basis points for carrying additional liquidity on the balance sheet.
Daryl N. Bible: Turning to slide nine to look at the average balance sheet trends.
Daryl N. Bible: Average investment Securities were $27 5 billion decreasing modestly during the fourth quarter <unk>.
Daryl N. Bible: Average interest bearing deposits at the fed increased $3 $5 billion to $30 2 billion.
Daryl N. Bible: Due to our decision to have more liquidity on the balance sheet. This was mainly funded with strong deposit growth.
Daryl N. Bible: Average loans increased slightly to $132 8 billion and average deposits grew $2 billion to 164 seven.
Daryl N. Bible: <unk> 7 billion.
Daryl N. Bible: Turning to slide 10 to talk about average loans.
Daryl N. Bible: Average loans and leases increased slightly growth in C&I and consumer loans outpaced declines in CRE and residential mortgage loans.
Daryl N. Bible: Growth in C&I loans were driven largely by dealer.
Daryl N. Bible: Banking and corporate and institutional businesses.
Daryl N. Bible: Loan yields increased 14 basis points to 633% with higher yields across all loan categories.
Daryl N. Bible: Of note our consumer loan yield increased 26 basis points as we continued to benefit from higher yields on new originations compared to yields on runoff balances.
Daryl N. Bible: Turning to slide 11, our liquidity remains strong.
Daryl N. Bible: At the end of the fourth quarter investment securities and cash, including cash held at the fed totaled $56 7 billion, representing 27% of total assets.
Daryl N. Bible: The duration of the investment securities portfolio at the end of 'twenty. Two 'twenty three was about three seven years and I didn't realize pre tax loss in available for sale portfolio was $251 million.
Daryl N. Bible: Turning to slide 12, we continue to focus on growing customer deposits and were pleased with our growth in average deposits average deposits totaled grew 2 billion approximately three quarters of that quarterly growth was from customer deposits.
Daryl N. Bible: Average demand deposits declined $3 8 billion, reflecting a continued shift toward higher yielding products, such as sweep money market savings and time deposits.
Daryl N. Bible: The mix of average non interest bearing deposits was 30% of total deposits compared to 33% sequentially, excluding broker deposits and noninterest bearing deposit mix in the fourth quarter was 33%.
Daryl N. Bible: Encouragingly, we saw the pace of deposit cost increases slow through the quarter.
Daryl N. Bible: Continue on slide 13.
Daryl N. Bible: Noninterest income was $578 million up 3% sequentially.
Daryl N. Bible: The increase was largely driven by a strong quarter for our commercial mortgage banking revenues growth in trust income and a small unrealized gains on certain equity securities.
Daryl N. Bible: Other income also benefited from higher loan syndication fees.
Daryl N. Bible: Decrease in rates towards the end of the quarter drove the increase in commercial mortgage banking revenues.
Daryl N. Bible: Turning to slide 14, we continue to focus on controlling expenses non interest expenses were 124 5 billion.
Daryl N. Bible: Excluding the 197 million FDIC special assessment, noninterest expense or 1.25 billion down 2% from linked quarter and the adjusted efficiency ratio was 53, 6% largely unchanged from the third quarter.
Daryl N. Bible: The decrease was driven by reductions in other expenses as the result of losses associated with certain retail banking activities in the linked quarter and lower merchant discount and credit card fees.
Daryl N. Bible: The decrease in other expenses was partially offset by higher professional and other services.
Daryl N. Bible: Salary and benefits decreased modestly from the third quarter as a result of lower average head count and seasonally lower benefit costs, partially offset by higher severance expense.
Daryl N. Bible: Next let's turn to slide 15 for credit.
Full year net charge offs totaled 33 basis points in line with our long term historical average and expectations for set out earlier in 2023.
Daryl N. Bible: Net charge offs for the quarter totaled $148 million or 44 basis points up 15 basis points over the linked quarter.
Daryl N. Bible: This quarter's increase was largely driven by three office related charge offs located in New York City, Boston, and Washington, D C and two C&I charge offs related to our online retailer and to our RV dealer.
Daryl N. Bible: Non accrual loans have trended down each consecutive quarter since the first quarter of 2023.
Daryl N. Bible: That trend continued in the fourth quarter with non accrual loans declined $176 million from linked quarter to $2 2 billion.
Daryl N. Bible: Our non accrual ratio of $5 15 basis points from the third quarter to 162%. The decline was primarily driven by the transfer of certain loans to accrual.
Daryl N. Bible: Marshall payoffs and charge offs on loans previously deemed non accrual.
Daryl N. Bible: Since the end of 2022.
Daryl N. Bible: We have increased the allowance over $200 million and the allowance to loan ratio was 13 basis points.
Daryl N. Bible: Ending 2023 at 125, 9%.
Daryl N. Bible: In the fourth quarter, we recorded a provision of $225 million compared to net charge offs of $148 million.
Daryl N. Bible: This resulted in allowance fell to $77 million this quarter, an increase the allowance to loan ratio by four basis points.
Daryl N. Bible: Current quarter build was primarily reflective of the commercial real estate values and higher interest rates contributing to modest deterioration in the performance of the loans to commercial borrowers as well as loan growth in the C&I and consumer portfolios.
Daryl N. Bible: Turning to slide 16.
Daryl N. Bible: When we file our Form 10-K in a few weeks, we estimate that the level of criticized loans will be $12 6 billion compared to $11 1 billion at the end of September.
Daryl N. Bible: We completed thorough reviews covering more than 60% of all CRE.
Daryl N. Bible: Including maturities in the next 12 months construction loans watch loans at all criticized loans.
Daryl N. Bible: The increase in criticized CRE loans was tied to these reviews and to 'twenty 'twenty four maturities, where the prospect of continued higher rates could negatively impact.
Daryl N. Bible: Performance of the portfolios or create shortfalls and debt service coverage or require interest reserves for construction loans.
Daryl N. Bible: The growth in criticized C&I loans was not tied to any specific review, but rather the completion of an annual review cycle and our ongoing quarterly update upon receipt of interim financials.
Daryl N. Bible: Generally our reviews do not incorporate any benefit of the forward curve and potentially lower interest rates.
Daryl N. Bible: 10 largest downgrades accounted for half of their total C&I downgrades.
Daryl N. Bible: And represented a range of industries.
Daryl N. Bible: Common themes include pressures from higher interest rates and labor costs.
Daryl N. Bible: During the fourth quarter criticized non owner occupied C&I loans increased 663 million accounting for 44%. The total increase in criticized loans.
Daryl N. Bible: Credit size permanent CRE loans increased $441 million.
Daryl N. Bible: Presenting 29% of the increase in criticized construction loans increased $375 million.
Daryl N. Bible: Turning to slide 17, and 18 for more details on the criticized loan portfolio.
About 18% of the increase in criticized loans was driven by health care.
Daryl N. Bible: 13% by multifamily and 9% by retail CRE loans.
Daryl N. Bible: Loan to values remain strong for these loan types ranging from low 50% range for retail mid 50% range for multifamily and high 50% range for health care to date modifications at maturity have had sponsors generally support their loans.
Daryl N. Bible: The replenishment of reserves.
Daryl N. Bible: Loan Paydowns and enhanced recourse that is why our criticized has not led to growth in non accruals, our conservative underwriting and strong client selection has been supportive of these assets.
Daryl N. Bible: Reflective of the financial strength of the portfolio diversification of our CRE borrowers, 96% of criticized accrual loan balances and 53% of nonaccrual loans are paying as agreed.
Turning to slide 19 for our capital.
CET one ratio at the end of 2023 was an estimated 10, 98% compared to $10 95 per share at the end of the third quarter the.
Daryl N. Bible: The increase was due in part to continued pause in repurchase in shares combined with continued strong capital generation.
Daryl N. Bible: At the end of December the negative eight OCI impact on CET, one ratio for available for sale securities and pension related components would be approximately 20 basis points.
Daryl N. Bible: Now turning to slide 20 for outlook.
Daryl N. Bible: First let's talk about the economic outlook, we see so called soft landing scenario is having highest probability but the possibility remains for mild recession brought on by late impact of rate hikes from last year.
Daryl N. Bible: We are encouraged to be continued strong performance by the consumer as.
Continue job gains as well as wage growth above inflation helped drive consumer spending.
Daryl N. Bible: Consumer spending has slowed enough to alleviate inflation pressure for many goods and services, we expect that to continue in 2024.
Daryl N. Bible: Inflation figures remained above that target of 2% chiefly because our friends in home prices, while the prices of many consumer goods have fallen and inflation for consumer services has slowed.
Daryl N. Bible: We expect weakness seen in rack listings to play through to the official inflation data in 2020 for helping to bring the headline inflation figures it out.
Daryl N. Bible: Our outlook incorporates the forward curve that has multiple 25 basis point fed cuts in 2024.
Daryl N. Bible: With that backdrop, let's review our net interest income outlook, we expect taxable noninterest income to be in the $6 seven to $6 8 billion range.
Daryl N. Bible: And net interest margin in the 300 Fifty's.
Daryl N. Bible: Outlook reflects the impact of higher deposit funding costs and the impact of different interest rate scenarios. As we have discussed we continue to carry a high level of liquidity.
Daryl N. Bible: Our current level of HQ L. A is about 46 billion, which is two thirds and the cash and one third in investment Securities and 2024, we started to shift some cash into securities.
Daryl N. Bible: This combined with other potential hedging actions can help protect the downside risk for NII from lower rates, but may reduce NII in 2024.
Daryl N. Bible: We expect full year average loan and lease balances to be in the $135 billion to $136 billion range.
Daryl N. Bible: We expect growth in C&I, and consumer, but anticipate declines in CRE and residential mortgages.
Daryl N. Bible: Average deposits are expected to be in the 163 to 165 billion range.
Daryl N. Bible: We are focused on growing customer deposits at a reasonable cost.
Daryl N. Bible: Level of broker deposits is expected to decline through the year.
Daryl N. Bible: Turning to fees, we expect noninterest income to be in the $2 three to $2 4 billion range.
Daryl N. Bible: <unk> solid fee income across many business lines, Florida rates will help drive stronger residential and commercial mortgage banking revenue.
Daryl N. Bible: Trust income is expected to grow from current levels from higher valuations and increase in clients.
Daryl N. Bible: Turning to expenses, we anticipate noninterest expenses, including intangible amortization.
To be in the five to five to $5 $3 billion range.
Daryl N. Bible: Outlook includes our typical first quarter seasonal salary and benefit increase which is estimated to be $110 million.
Daryl N. Bible: We also included the outlook to be approximately $53 million for intangible amortization.
Daryl N. Bible: Our business lines are focused are holding their expenses flat, while allowing us to continue to invest in our franchise and our key priorities. These priorities include growing in new England, and long island markets optimizing resources and both expense savings and revenue generation Trans.
Daryl N. Bible: Our systems and processes, making it more resilient and scalable and continuing to build out our risk management.
Daryl N. Bible: Turning to credit we expect net charge offs for the full year to be near 40 basis points due to the ongoing credit costs normalization in the loan portfolio and resolution of some stress credits.
Daryl N. Bible: We expect that the taxable equivalent rate to be 24, 5% plus or minus 50 basis points.
Finally, as it relates to capital our capital coupled with limited investment security Mark has been a clear differentiator for LMT and strength of our balance sheet is extraordinary.
Daryl N. Bible: Take our responsibility to manage our shareholders capital very seriously.
Daryl N. Bible: And where we turn.
Daryl N. Bible: More when it is appropriate to do that our businesses are performing very well and we are growing new release relationships each and every day.
Daryl N. Bible: While every economic uncertainty is improving our share repurchase remains on hold our decision to resume share repurchases. We'll consider the results of the 2024, and Charles and supervisory stress test, including the stress test capital buffer.
Daryl N. Bible: Additional clarity on Basel, III and game regulations and.
Daryl N. Bible: And continued stabilization and economic conditions as it relates to their probability of a mild recession.
Daryl N. Bible: That said, we continue to use our capital for organic growth and growing new customer relationships.
Daryl N. Bible: Buybacks have always been part of our core capital distribution strategy and will again in the future in the meantime, our strong balance sheet will continue to differentiate us.
Daryl N. Bible: With our clients communities regulators investors and rating agencies.
Daryl N. Bible: On slide 21, there is a summary of three enhancements, we made to our financial reporting.
Daryl N. Bible: First we reclassified the substantial majority of owner occupied loans and related interest income from CRE to C&I loves.
Daryl N. Bible: This better aligns with the classification with the underlying management and repayments source of the loans.
Daryl N. Bible: In the upcoming 10-K, we are changing our operating segments to reflect how management organizes its businesses to make operating decisions allocate capital resources and assess performance.
Daryl N. Bible: Third a certain categories have started it can contribute more or less to our expense base. We opted to include printing postage and supplies and other costs and operations and breakout professional and other services as a distinct line item in the income statement.
Daryl N. Bible: To conclude on slide 22, our results underscore and optimistic investment thesis.
Daryl N. Bible: While the economic uncertainty remains high.
Daryl N. Bible: This is where <unk> has historically outperformed peers.
Daryl N. Bible: He has always been a purpose driven organization our successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperformance.
Daryl N. Bible: Through all economic cycles, while growing in the markets we serve.
Daryl N. Bible: <unk> focused on shareholder returns and consistent dividend growth. Finally, we are guessing disciplined acquirer and prudent steward of shareholder capital our integration of peoples United is complete and we are confident in the ability to realize our potential post merger.
Speaker Change: Now, let's open up the call to questions before which Michael will briefly review the instructions.
Michael: Thank you at this time, if you would like to ask a question. Please press the star and one on your telephone keypad now you.
Michael: You may remove yourself from the queue at any time by pressing star two and once again that is star one to ask a question.
Our first question comes from Gerard Cassidy with RBC.
Gerard Cassidy: Hi, Darryl how are you.
Darryl: Don't get Gerard and yeah. Good.
Darryl: Can you give us a flavor for when you guys look at the capital.
Darryl: Capital structure of EM, and Ts, you're putting out is quite strong.
We get beyond Basel, III end game, and you'll see what your new stress capital buffer will potentially be what do you see a comfortable level of CET one on a longer term basis. Once those two unknowns are known and you can factor that into your thinking.
Speaker Change: You know I would say you know it depends obviously on the environment that you're in and you know what whether were.
Speaker Change: Doing that transaction are not doing a transaction, but you typically would want to operate with a buffer of maybe 50 to 100 basis points over what's required.
Speaker Change: From that regulations at what we have there would probably be a way to probably peg it.
Speaker Change: Okay very good and then based on the experience of M and T. Obviously over a long period of time, you guys put out in your investor decks that your credit losses are generally at or below peers.
Speaker Change: With the increases in your criticized loans that you've shown today, the C&I and CRE.
Speaker Change: Do you still feel comfortable that you guys can maintain that kind of a long term track record of being better than it appears on the credit losses.
Speaker Change: Yeah, Yeah, I think you know it's.
And long history here at <unk> I mean, if you if you look at it you know we have been disciplined.
Speaker Change: Selection, our client selection sponsorship, but underwriting you know and our loss history is really low and kind of shows that.
Speaker Change: The future remains uncertain, but if you look at it.
Speaker Change: It's not a predictor of the past and we're going to lean in on our client selection underwriting approach has really not changed.
Speaker Change: Ltvs are strong and we have really good approach to our underwriting.
Speaker Change: Our largest sponsors that we have right now are supporting their credits they are putting money into credits refinancing.
Speaker Change: And many of the charge offs that we realized in 'twenty three came from what I would say not long term clients.
Speaker Change: More financial or institutional type money.
Speaker Change: But over the long term, we think that our client selection will win the day.
Speaker Change: Yeah, Yeah, Yeah go ahead.
Speaker Change: And just quick.
Speaker Change: Just quickly to follow up on that.
Speaker Change: Is it safe to assume that the criticized loans are more a reflection of market conditions, rather than a change in underwriting standards two or three years ago that has led to these types of increases.
Speaker Change: Yeah, if you look at where the increases came from multifamily. It's really more interest rate driven is really what's driving that it might have a little bit higher operating costs.
Speaker Change: The most part they're NOI business models are performing very well.
Speaker Change: So eventually you know over time, I think that will cure itself.
Speaker Change: Do relatively well.
Speaker Change: You look at construction construction overall is actually outperforming what's going on out there.
Speaker Change: There is stress stress in some of the Takeouts right now, but as rates come down I think eight agency takeouts will actually help in that sector.
The health care side.
Speaker Change: Right now, it's really more of a reimbursement problem.
Speaker Change: Oh Wow.
Speaker Change: And costs are going up it takes a while for them to get better reimbursement costs. So I think that will help over time, there's a lot of demand in that sector and I think as cost level off plus there's an active takeout market through agencies like hut from that perspective.
The office if you look at office. The one advantage we have in office is that we have a really good distribution of maturities.
Speaker Change: Over two thirds of our maturities start in 'twenty six and beyond.
Speaker Change: So I think that's a positive and the other property types, we have like retail and hotel are generally stable to improving.
Speaker Change: Very good thank you for the color.
Speaker Change: Okay.
Speaker Change: And our next question comes from <unk> with Morgan Stanley.
Morgan Stanley: Hi, good morning.
<unk>: Can you talk about the puts and takes in the NII guide.
Speaker Change: I know you are.
Speaker Change: Sensitive with the buildup in liquidity in the skewed to Marshall.
Speaker Change: So if we get.
Speaker Change: More or fewer rate right.
Speaker Change: And what's in the fall what Gov.
Speaker Change: What happens with NII and then.
Speaker Change: You mentioned your.
You started the yard putting some more or deploying some of your cash into securities.
Can you talk about what duration you are taking on there and what that would mean for the asset sensitivity.
Speaker Change: Yeah. So the guide that we gave at $6 seven to $6 8 billion I would say our three you know 25 basis point cut would be at the higher end of that range. So closer to $6 8 billion I think from that perspective, you know if rates go maybe five or six cuts failure.
Speaker Change: Or is it maybe a lower end of that range.
Speaker Change: You know we've decided that over the next couple of quarters, we're going to you know.
Speaker Change: Try to moved as close as you can to a neutral position we started to put some money into securities and we will continue to do some hedges and interest rate swaps were going to average in over time, we're going to do it all at once and just kind of dollar average in to get it more neutral so that we can produce stable and predict.
Double earnings overtime, and not have impact on interest rates. So I think we feel pretty good about what we're seeing there.
Speaker Change: From a deposit beta perspective, yeah, I would tell you that.
Speaker Change: Deposit betas, maybe are close to peaking from that perspective, you know maybe our net interest margin is close to bottoming out maybe in the next quarter or two.
Speaker Change: So I feel actually pretty good that we'll be able to start to grow NII, maybe towards the second half of the year and definitely into 2025.
Speaker Change: Got it and.
Speaker Change: And maybe just a couple of <unk>.
Speaker Change: A short question John on credit I mean, I think you mentioned that.
Speaker Change: The reviews on commercial real estate do not bake into forward curve. So does that mean that if the forward curve plays through that criticized assets should come down or.
Speaker Change: As you described.
Speaker Change: Thanks go out to the remaining 40% of the book did that could put some upward pressure there.
Speaker Change: And I'm, sorry, if I missed it but did you give what your updated office yourselves floor, because I know you built in Brazil, just joined this quarter.
Speaker Change: Yeah, Let me take your first question first.
Speaker Change: No we really don't take into account the forward curve when we go through the review that we're doing.
Speaker Change: You know a lot of the properties like I said earlier like multifamily is more rate driven than anything else. Their business models are intact. So you have good at O I.
Speaker Change: I'd say as rates fall if rates go maybe 100 basis points or more that could be but we will probably will be a positive impact for our credit costs now may not flow in as rates actually materialize. It have to come through when we're doing our next review.
Speaker Change: But that pressure I think would alleviate.
Speaker Change: And probably have an impact on the levels that youre seeing from that perspective.
Speaker Change: From an office perspective.
Speaker Change: That.
Part of the sector is a little bit different because it also has some structural challenges.
Speaker Change: If you look at that that's going to probably play out more over time.
Speaker Change: It's gonna be when leases and vacancy rates kind of mature off.
Speaker Change: Blessed to have a longer.
Speaker Change: From a maturity perspective, which is great planning for from a credit team.
Speaker Change: The top risks that we have there are embedded in the ratings and reserves that we have evaluations. We have I think it takes into account the risk I think we're around.
Speaker Change: Is it.
Speaker Change: Or quite 4% right now.
Speaker Change: So I think we feel good at that.
Speaker Change: And if you look at the real.
Tower will be when leases mature and.
Speaker Change: And you have resizing risk you know, what's going to happen at that point, but we have a lot of time for that to play out I would tell you. If you just look at the signature transaction, there's a lot of money out on the sidelines that will definitely come in and play in and be there right now there's a difference between bid ask spreads but there.
Speaker Change: There is money that will come into the market at some point.
Speaker Change: Great.
Speaker Change: The officers of was was four 4%.
Speaker Change: Yes.
Speaker Change: Okay. So did the reserve build.
Speaker Change: Somewhere else in the portfolio because I know you built reserves this quarter.
Speaker Change: We did I would say the reserve builds were mainly driven by the increase in criticized if you look at our pace that we have in the slide deck.
Speaker Change:
Speaker Change: Actual office criticized numbers actually fell.
Speaker Change: Our increases in criticized were.
Speaker Change: Health care and and.
Speaker Change: Multifamily and hotel.
Speaker Change: Those are really the ones driving the increase that was probably two thirds of the increase the other third was due to the loan growth that we had which was C&I and consumer loans.
Speaker Change: So you can kind of see that build wasn't that large for the increases that we had we just really don't feel we have a lot of loss component because of the loan to value ratios that we have and the collateral that we have on those transactions.
Speaker Change: Got it thank you.
Speaker Change: Yep.
Speaker Change: And do we have our next question from John <unk> with Evercore ISI.
John: Good morning, Todd.
John: Just on the just back to the reserves.
Todd: I know you cited.
Todd: For current real estate valuations and changes there or what.
Todd: I know you gave us the Ltvs you cited a few of them are they refreshed ltvs and it's not.
Todd: Oh.
Todd: <unk> declines are you seeing.
Todd: In your as you work through the office portfolio specifically.
Speaker Change: Yes, so when we have done these reviews I would say we have about 60% of our CRE portfolio. That's been a very thorough review obviously were picked up in the larger ones. The ones that are in larger cities that might have more risk from a valuation decline, we're seeing probably on average about a 20% decrease.
Speaker Change: And evaluations.
Speaker Change: <unk> are probably correct within the last year or so so.
Speaker Change: So we feel really good with that.
Speaker Change: We continue to you know have reviews every quarter.
Speaker Change: <unk> continues to be very thorough in how we're looking at.
Speaker Change: But I think the reserves, we have today I feel pretty good about.
Speaker Change: Okay. Thank you one more just on that.
Speaker Change: It could be.
Speaker Change: Criticized screw.
Speaker Change: Scrub that you did is that was that just that was that more of a scrub of the portfolio. It sounds like the way you described it it was and if so.
Could you expect less of an increase in criticized assets and related reserve build from this level.
Speaker Change: You know John I would love to tell you that this is the peak of our criticized.
Speaker Change: We have to finish up when we did the majority of our construction loans, we have a little bit more construction loans to do this next quarter and we're always subject to getting more information and you know as we get new financials, and new vacancy information and all that but I feel pretty good that we did a very thorough.
Speaker Change: I'll review of what we have out there we really looked at all the spots that we thought.
Speaker Change: We have the most risk and really took that into account but.
Speaker Change: But I can't tell you today that we're at the top at some point hopefully we will be able to say that.
Speaker Change: Great Alright, thanks Darryl.
Speaker Change: Yep.
Speaker Change: And do we have our next question from Ebrahim <unk> with Bank of America.
Speaker Change: Yeah.
Ebrahim: Hey, good morning, guys.
Speaker Change: Good morning.
Speaker Change: I guess just on.
Yes.
Speaker Change: It was non accrual.
Speaker Change: And in general given the work you've done.
Speaker Change: And sorry, if I missed this like should we expect so far the growth in criticized is not reflected in <unk> sort of Ken.
Speaker Change: Translated into non accruals should we expect that to change as you see some of your customers Flolan Kenan.
Speaker Change: More pressure given just the lagged impact of each cycle or.
Speaker Change: Or could we still see non accruals can lower and then what jives criticize lower from where we are today is it just time and maturity of these loans or could we see a pretty decent decline over the coming quarters.
Speaker Change: You know I think the increase that we have today was basically a review of looking at everything that we have out there.
Speaker Change: And I would tell you that you know interest rates, probably drop was the biggest one labor cost was probably the next biggest increase.
Speaker Change: There was a little bit of increase in C&I as well and then C&I. There was nothing idiosyncratic. There there was a mixture of you know if you look at it the largest 13 credit seven different industries. So it's pretty diverse from that perspective, so we feel pretty good overall.
Speaker Change: With where we stand.
Speaker Change: Only 6% of our criticized.
Speaker Change: Got into non accrual.
Speaker Change: What our historical numbers have been what I talked when Gerrard asked the question you know, we really feel good about our client selection, we're seeing our sponsors and clients really stand up and really support these credits and we think that what we have in classified is the right direction.
Speaker Change: That doesn't mean, a few may not slip into non accrual, but I think for the most part we don't really see a lot large period of losses. If we did we would've had to put more in the reserves and that's what we're seeing or projecting.
Speaker Change: Got it I think it was maybe one question on capital.
Speaker Change: Although the digital bank earlier this week talked about.
Speaker Change: The need for skill for regional banks coming out of what happened last March.
Speaker Change: <unk> been acquisitive from time to time, they under very deliberate can you just talk to us in terms of one <unk>.
Speaker Change: I would like to do deep bank deals as they come through over the next 12 to 18 months and secondly.
Speaker Change: Like do you see the landscape, becoming glitch with feed opportunities as we move forward.
Speaker Change: Yeah, He's always done acquisitions that have grown.
Speaker Change: Over the years, you know our business model is really to stick to that the regions that we're in and to really meet the needs of those communities and we like to grow share in those markets.
Speaker Change: So.
Speaker Change: Whether you need scale or not.
Speaker Change: I've been on both sides of that right now and I would tell you that it's.
Speaker Change: You know, it's not something you have to have it something if it makes sense I mean, when you acquire somebody you got to make sure. It's a good cultural fit first and foremost that is critical.
Speaker Change: You have to really make sure that you know if you could get synergies that as those come through both on the expense and revenue side. So you know we closed on People's we're starting to get got all the cost synergies were in the midst of investing now more into new England in long island. So we're going to continue to grow that it usually take.
Speaker Change: I would say three to five years to really get the total performance.
Speaker Change: From these acquisitions. So we still have a lot of work to do from that I'm sure down the road.
Speaker Change: <unk> is a favorite acquirer or somebody might want a solid to us at some point, but right now we've got a lot of work in front of us.
And we're focused on really making that it's one of our top four priorities right now and where we're going to do that and deliver that.
Thank you Dan.
Speaker Change: Yep.
Speaker Change: And we have our next question from Frank Schiraldi with Piper Sandler.
Frank Joseph Schiraldi: Good morning.
Frank Joseph Schiraldi: Good morning.
Frank Joseph Schiraldi: You mentioned you know the considerations for getting back to the buyback.
Frank Joseph Schiraldi: Is it reasonable to think that maybe the last trigger or glass consideration is the stress test is CCAR.
Frank Joseph Schiraldi: And so you know.
Frank Joseph Schiraldi: Just wondering is the second half of 'twenty four do you think the more likely scenario.
Frank Joseph Schiraldi: For for restarting the purchases.
Speaker Change: Yeah, you know Frank you know I would love to be buying shares back, especially at the level that we're trading at right now I think it's a really good value.
Speaker Change: Now we just wanted to make sure that we go through the stress tests, we find out where our limits are.
Speaker Change: We've got to make sure there's a lot of uncertainty out there.
Speaker Change: We just don't want to go into recession, and if we do that probably would hold back for those purposes, but.
Speaker Change: We're in the midst of really making a really strong bank for really changing it to be less relying on on balance sheet commercial real estate and really more driven through.
Speaker Change: Our off balance sheet products and services that we're growing our other businesses both on the balance sheet and in fees and we're really excited about that.
Speaker Change: I promise you, we will do share repurchases can't tell you when that's going to happen, but it is core to our strategy and we will definitely do that when we think it's appropriate.
Okay, and then just a quick one if I put on.
Speaker Change: The deposits are noninterest bearing balances just your thoughts on you talked I think about deposit costs beginning to abate is beginning to stabilize.
Speaker Change: Any thoughts on levels of noninterest bearing from here or are you starting to see stabilization in balances around this 30% of total deposit number and then as part of that can you just talk about how trust balances played into the linked quarter change in noninterest bearing if at all.
Speaker Change: Yeah.
Yeah, no that's a good.
Speaker Change: Good questions. So we did see through the quarter and the fourth quarter that our DDA balances were starting to stabilize now that's one of the biggest components of what's impacting net interest income is that migration from DDA into sweeps.
Speaker Change: Hopefully that will kind of play out over the next quarter or two is that kind of stabilizes.
Speaker Change: I think when you look at the retail side of the chain.
Speaker Change: You know we.
Speaker Change: Still grow our CD book.
Speaker Change: That will probably continue until rates really start to fall you didn't really see growth in Cds till we got over 3%. So were probably have to go down a little bit before that growth probably slows down a bit.
Speaker Change: But it's important that we priced that correctly and our disclosures, we combined our retail Cds with our broker Cds, you know and I did say in the prepared remarks that we probably plan to shrink our broker Cds every time, so that category will probably fall throughout the year, but it's probably driven more by by now.
Speaker Change: <unk> clients from a trust perspective, it had a modest.
Speaker Change: Impact on it I would say it wasn't that big of an impact.
Speaker Change: From that it was really just drop and more in the commercial space for the most part.
Speaker Change: Okay, Alright, great. Thank you.
Speaker Change: Youre welcome.
Speaker Change: And we have our next question from Erika Najarian with UBS.
Erika Najarian: Hi, Darryl.
Erika Najarian: Just a few follow up questions. Please.
Erika Najarian: On the <unk> line of questioning.
Erika Najarian: I'm wondering what is your current assumption for downside data for the first hundred basis points of cuts and is there anything about this cycle, where we can't look at historical precedence in terms of.
Erika Najarian: <unk> volume reaction.
Erika Najarian: Or cumulative beta reaction.
Erika Najarian: The fed easing.
Speaker Change: Yeah. So you know if you look at our betas on accumulative basis going up where now you're in the low 50% range, but that includes the broker piece of that so if you take that away, we're probably in the mid forty's and on the downside I would probably say early on will start probably in the 40.
Speaker Change: On the way down as well.
Speaker Change: As it goes down, though you won't be able to sustain that because while we increased a lot of our rates higher in the commercial area and our wealth area and some of our institutional areas. So those will come down as they went out.
Speaker Change: The retail side really did not come down.
Speaker Change: It didn't go up as much so it won't come down as much. So you know if you go down 100, or 200 basis points, you were actually going to have a declining beta impact is probably what you're going to see play out depending on how much the fed actually lowers rates, but I think early on you youre going to see something similar to that on the way down in the forties would be my best guess.
Speaker Change: Yes.
Speaker Change: Got it and a follow up question on credit how should we think about the progression of your ACL ratio from here you mentioned in your prepared remarks, you'd already built up your reserve pretty significantly.
Speaker Change: As you think about.
Normalization and then whatever maturity walls you have in CRE.
Speaker Change: Should we expect at your ACL ratios could continue to build from here.
Speaker Change: This is sort of our first.
Speaker Change: T cell would charge offs actually going up.
Speaker Change: I know it is.
Speaker Change: We feel really good where our reserve is right now I can't promise you, it's not going to go up but we've been done a very thorough review of all of our what we think are higher risk type credits in the CRE space in the commercial space as well.
Speaker Change: So no promises that it cant go up anymore, but we feel really good where we are today.
Speaker Change: And where we are reserved.
Speaker Change: Thanks, Joe.
Speaker Change: And our next question comes from Bill Quirk Gotcha with Wolfe Research.
Bill Carcache: Thank you good morning Darryl.
Bill Carcache: Can you take us inside some of the discussions that youre, having with your commercial clients.
Bill Carcache: How confident are you that the ingredients are in place for a reacceleration in loan growth. This is indeed, the soft landing scenario plays out.
Bill Carcache: I if you look at what our clients have been saying for the most part they have been more on the sidelines.
And really been leery of investing in their businesses.
Bill Carcache: I think it's actually I get kind of excited if the fed just lowers rates just a little bit I think that markets will get excited and you're going to have some things take off and there'll be a lot more investment, which will help the lending side I actually they'll get more excited on the fee side as well. We saw you know a fair amount of activity.
Bill Carcache: He just in December with the move that you had in the yield curve and treasuries.
Bill Carcache: There was a lot of pent up demand and we were able to do some placements in our commercial mortgage area and you saw that flow through with some fee income. So I get kind of excited that if the fed just lowers rates just a little bit I think you know we're going to have more momentum.
Bill Carcache: Come through then what Youre actually seeing maybe in the guide that we have.
Speaker Change: That's really helpful. Thank you and then following up on <unk> question.
Speaker Change: The reserve rate trajectory within CRE. Some has indicated that in this environment. There it would be more likely to maintain reserve rates in office CRE as charge offs occur.
Speaker Change: Is it reasonable to expect that there would be a lag between when we see peak losses in CRE and <unk>.
Speaker Change: When you actually start to release reserves.
Speaker Change: We go through the analysis I mean, its a model right and it's based on our variables. So if you look at the variables we had this past quarter.
Speaker Change: Quarter.
Speaker Change: The variables for like GDP, and unemployment was basically unchanged.
Speaker Change: And they actually got a little bit better on crappy and on <unk>.
Speaker Change: H P I.
Speaker Change: It actually helped in the reserve calculation. So we're using the macro variables coupled with you know what the how do we think that the credits are rated from a credit perspective and it all comes together.
Speaker Change: Timing perspective, I think it's hard to say exactly when reserves will get adjusted.
Speaker Change: Now you know we feel good with what we have.
Given what you know or a risk is that we know right now on the credit side, but you know overtime.
Speaker Change: <unk> and there will be some reserves, but it releases, but you just don't know when that's going to happen all in small more model driven.
Speaker Change: Very helpful. Thanks Darryl.
Speaker Change: Yep.
Speaker Change: And our next question comes from Brian Foran with autonomous.
Brian Foran: Hi, guys.
The one question going back on.
Brian Foran: On the way down that I, sometimes get from investors and they never have to break the answer and you guys have historically been pretty good about thinking about normalized margins and drivers. So hopefully you can do better than me.
Brian Foran: We all talk about deposit costs.
Brian Foran: Crop.
Brian Foran: But if I think about deposit margins over time.
Brian Foran: And I know, there's different ways to measure them, but.
Brian Foran: That's fun.
Brian Foran: The spread between deposits and fed funds, it's basically an all time high for you and the industry.
Brian Foran: Little less extreme relative to two in five year treasuries, but it's still elevated.
Brian Foran: Or even just more simplistically like your deposit costs today.
Brian Foran: Still you know a little bit lower than they were in the last time the fed Lucia.
Brian Foran: So I know a lot has changed over time, but just have you thought about that just makes sense that deposit margins.
Or liability margins more broadly or kind of higher than they had been historically.
Brian Foran: And where on your worry list is the idea that.
Brian Foran: They were pretty high to start with maybe at the fed cuts.
Brian Foran: It is our it 40 or 50%, there 20 or 30%.
Speaker Change: Yeah, I would say I don't think it was Eric because question or well when I was saying as rates fall.
Speaker Change: The beta will start to come down just because the consumer side did not go up as much. So I think we'll start off at a higher pace, but as that comes down that will be less from that.
Speaker Change: If you look at it I actually like the level of interest rates, where we are today I mean were in the low fives is where the fed is if we say, let's say in the 4% range or maybe even as low as 3% as long as we price our assets and deposits appropriately.
Speaker Change: And so getting back to basics business and we get good spreads on that there is no reason, we can have very healthy net interest margins for a very long period of time.
It's all about pricing your assets and deposits correctly, you're making sure you're putting prepayment language in on your fixed loans and making sure your pricing deposits appropriately but it's.
That's a great environment for banking and margins I feel really good from that you know would we trend higher than where we are today, probably over time, but it really comes down to discipline, you really work on the asset mix change at that time.
And in times like that when rates tend to be in that time period economy seems to be going pretty well.
Speaker Change: So you probably have good loan growth out there in a pretty decent deposit growth. So I actually get excited once rates come down a little bit and we can really operate the bank.
Historically I think we'll have good really good returns.
And maybe as a follow up.
Yeah.
Speaker Change: The theme of kicking off this whole deposit and margin worries cycle at the Barclays Conference. A couple of years ago I think at that time. The the original message what the NIM was four 4.1 and through the cycle you bought three six to $3 nine was a normalized range.
Speaker Change: That still the thinking like would be a three five or so in 'twenty four but.
Speaker Change: Normalized at some point in the futures 36 to 49.
Speaker Change: I think that that's pretty much spot on Brian is that I would say you know Darren did a great job in this role and <unk>.
Speaker Change: Also called exactly what our charge offs were going to be in the beginning of the year and they came in pretty much spot on so he did a great job in this role, but when I look at it and see what's happening with <unk>.
Speaker Change: Right you know, maybe we bought them in the next quarter or two and net interest margin and we can start growing from there so I'm I'm pretty much in that camp as well.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: And our next question comes from Steven Alexopoulos with Jpmorgan.
Steven Alexopoulos: Hey, good morning Darryl.
Steven Alexopoulos: Good morning, maybe just start actually start where you just ended so that that normalized NIM range three six to $3 nine if we think about your commentary right you want to move to the balance sheet to board neutral position.
Steven Alexopoulos: Reason.
Steven Alexopoulos: Whatever normal curve looks like we haven't seen one in a while that you could move to the upper end of that range.
Steven Alexopoulos: This will be disappointed if you were three six like why why wouldn't you move to the very upper end of that range.
Speaker Change: Oh, Steve any you know.
Steve: I don't know hear about it.
Steve: About 2025 26.
Steve: Is there a is there a reason that.
Steve: You know you're not going to be $3 75 margin bank.
Steve: You know I I feel really good at the way we are positioned what makes us. So strong is we are really good at how we price our depart our assets, but what really makes it is that we are great at growing operating accounts.
Steve: That funding source is really starting to come back on and growing nicely. So we always have and probably will have a top quartile net interest margin.
Steve: So I feel really good about that we may operate a little bit lower just because we are going to carry a little bit more liquidity right now we're carrying about $4 billion more liquidity, just because we increased our internal stress liquidity scenarios based upon some of the learnings that we had from earlier in the year.
Steve: From that perspective so.
Steve: Cost of six basis points this quarter doesn't really impact NII, a whole lot a whole lot, but it impacts your margin just because you're a sudden water on assets and liabilities that don't make anything.
Steve: But yeah I feel really good in this rate environment, managing our balance sheet.
Steve: Doing the right thing for our customers and for our communities.
What banking is all about and I think we will be able to execute and perform really well in that environment.
Speaker Change: Got it.
Speaker Change: Okay.
Speaker Change: Just as a follow up so I know you've had 10 questions already on commercial real estate, but if we looked at this deep dive you did covering 60% of all commercial real estate loans. You know one what are you learning I don't know if you're talking to building owners as you work through that process, but as these do you have a billionaire.
Speaker Change: So criticized you know what's the expected workout will they put more equity and what are you expecting and then when I. When you called out the four 4% office reserve is that a general reserve on the office portfolio those specific credits coming due where youre anticipating losses. Thanks.
Speaker Change: Yeah, I mean, the four four is really a general him out there could be a little bit of a specific embedded.
But it's the bulk of it is more of a general reserve from what we're seeing from that perspective.
Speaker Change: We're seeing our clients our sponsors really step up and really support these credits.
Speaker Change: We think that was charge offs that we had this past year, we're really more financial.
Speaker Change: Institutional oriented.
But our sponsors because they are long term real estate owners over of the property I mean, they basically own properties, where they want to own them in a certain block in city of where they have it. So it is really long term oriented.
Speaker Change: It tend to have very low tax basis in these properties.
Speaker Change: And they're going to support these credits.
Speaker Change: Our over over time, so that's really what we're seeing there and when we go through and look at whether we should graded as criticized or not you are seeing some pressure on the debt service coverage ratio once it falls under 1.1. It goes into the 11, which is a criticized camp but the.
Speaker Change: Vast majority of what we have in criticized is between one and one pipeline yeah. We have one under one in that level, but the vast majority of what we have there.
Speaker Change: So over time, I think those will cure and wont result in loss for the most part.
Speaker Change: We did raise losses up a little bit for 'twenty for some of that was really normalization in the consumer portfolio.
Speaker Change: Oh and then some of it is maybe working out a few more credits you know off but for the most part.
Speaker Change: But what we haven't criticized as not materializing into losses.
Got it.
Speaker Change: Terrific color thanks for taking my questions.
Speaker Change: Yeah.
Speaker Change: And our next question comes from Ken Houston with Jefferies.
Ken Houston: Thanks, Kim good morning, Daryl.
Ken Houston: Just first question on the Securities book.
Speaker Change: Shrunk a little bit, but also the yield was flattish let's call. It I'm just wondering how you could talk us through them.
Speaker Change: How you're thinking about both of them.
Speaker Change: The size of the Securities book going forward and also what are you picking up on on maturities as Theyre going back in if we're starting to see this kind of flattish type of yield situations. Thanks.
Speaker Change: So we had a couple of things going on there so.
Speaker Change: If you look at what we have right now, we're probably going to take anywhere from $3 billion to $5 billion. This year and move from cash into the securities book over time.
Speaker Change: We're really focused on.
Speaker Change: Non convex type securities. So we don't have extension.
Speaker Change: We buy something at a duration of three years it stays at a three years perspective.
Speaker Change: Oh is that we're seeing right now are probably in the mid Florida plus or minus.
Speaker Change: So I think that I think that's going on pretty well. The other good benefit that we have is we have about $9 billion of U S. Treasuries, So as U S treasuries average yield close to 2%.
Speaker Change: So those are going to re price and we're going to put those back out and.
Speaker Change: Probably 234 year type duration or maturity treasuries and theyre going to reprice up over 200 basis points. There. So I think thats a real positive. So we're seeing a nice uplift in the securities portfolio.
Speaker Change: The thing to note and I'll just switch over to the loan book, Ken If you don't mind is that on the consumer book.
Speaker Change: Our auto didn't really grow but the volume we put on in our auto lending was like 250 basis points higher than what was rolling off at if you look at the RV portfolio and that did grow. Some this past quarter that was also up a couple hundred basis points with a higher yield silver from our reactivity.
Speaker Change: Perspective, our fixed portfolios are starting to really show our performance that have much higher yields.
Speaker Change: Yeah, that's great actually it was going to be my follow up on the loan side is do you have do you have a broader way of helping us think through that.
Speaker Change: Either the proportion of that book, that's fixed and re prices over the next year or two.
Speaker Change: You know, it's it I would say it's mainly.
Speaker Change: And the consumer book is that book, that's probably going to reprice higher.
Speaker Change: And from a C&I and CRE perspective, most of that is more floating because more and more like 60% floating and 40% fixed.
Speaker Change: So if you look at it like that you know mortgage portfolio.
Speaker Change: For the volume we put on in mortgage will be.
Speaker Change: Think probably at attractive yields there's not a lot of activity, we're going to originate and sell all conforming. So we generate fee income and not put it on the balance sheet, but we will support our clients in wealth, we will support our customers that we have for moderate and low income housing. So there'll be some volumes that go on in those ports.
Speaker Change: So that will reprice higher that would just be a little bit slower because of the volumes won't be as high.
Speaker Change: And sorry, one more final one just you mentioned earlier.
Speaker Change: The ongoing thought process of getting more of the production off balance sheet and kind of switching.
Speaker Change: NII to fees I'm, just wondering where you are in that process and build out an infrastructure and within that do you have an idea of where you think that the right commercial real estate on balance sheet concentration of the loan book should be versus the current 25%.
Speaker Change: <unk>.
Speaker Change: Yeah. So I would say our plans right now are to bring our CRE portfolio down probably another 3 billion. If you look in the last couple of years, we've been shrinking CRE about $3 billion a year that gives us time to basically work with our clients and meet their needs with more off balance sheet.
Speaker Change: It is so we're doing it at a measured pace. So we can do it and still meet the needs of our good long term clients from that perspective as far as what percentage. We're gonna ahead for I know, it's going to be lower than 25% I can't tell you you've got a couple of things going on CRE shrinking and the other portfolio.
Speaker Change: Increasing.
Speaker Change: So my guess is you'll probably see it drop a little bit faster than you might expect if we're successful or growing C&I in some of our consumer book.
Speaker Change: Thanks Sarah.
Sarah: Youre welcome.
Speaker Change: And we have our next question from Chris Spahr with Wells Fargo Securities.
Chris Spahr: Hi, good afternoon.
Chris Spahr: So this is about expenses and the efficiency ratio I mean, this is going back a while ago that you one point <unk> had a 50% to 55% efficiency target I know you that hasn't been updated in some time I'm. Just wondering what do you think given that the efficiency will creep higher in 'twenty four based on the guide and what do you think the efficiency.
Chris Spahr: We will settle in what's your normalized NIM.
Speaker Change: Yeah. So you know when.
Speaker Change: When you look at efficiency ratio, it's all about growing revenues faster than expenses and that's really what I kind of look at from that perspective.
Speaker Change: Really have a challenging time in 'twenty for growing revenue. So much just because we got net interest margin coming down some.
Speaker Change: Hope is that it levels off 24 and starts to grow.
Later in 'twenty four.
We can start in 'twenty five and you start to have positive operating leverage from that perspective.
Speaker Change: I'd say I'm very pleased with working with the leadership team that we have here at <unk>.
Speaker Change: We all agreed to come in and all business lines came in with flat expenses basically.
Speaker Change: Finding cost cuts they cover their merit increases and it kind of did that in their own businesses. So I think that was really well done from that perspective, we're guiding up a couple percent just because we're making some investments and some really key projects like digital like data, we have two transformations going on right.
Speaker Change: Now one in finance the other than commercial.
Speaker Change: We're investing in our Treasury management businesses.
Speaker Change: So we got a lot of investments, but you know given our leadership team I feel good that we will continue to be able to contain what growth we need there.
Speaker Change: And that we won't have.
Speaker Change: The goal would be to have revenue grow faster than expenses is really what we try to shoot for and that will kind of drive good positive operating leverage.
Speaker Change: So as a follow up so.
Speaker Change: Do you think you can manage like a few percent growth in expenses.
Speaker Change: <unk> 25, and 26, then it just based on kind of the budgeting experience notwithstanding.
I've given you a volume driven.
Speaker Change: Expenses.
Yes, I mean, when I look at the levers that we have on the expense side, you know, there's a lot of opportunities.
Speaker Change: If you look at it our procurement and sourcing areas are continuing to improve and get better in that area.
Speaker Change: Still have opportunities in our corporate real estate area to get more square feet down over time.
Speaker Change: We're really working with workforce management and really how to.
Speaker Change: Our operations and most efficient way possible I think our call centers have a lot of opportunity you know from automation perspective.
Speaker Change: One of our themes that we have in 'twenty 'twenty four is simplification really tried to simplify what we are doing today, so and the transformations that are going on.
Speaker Change: How we do this we will have less processes and much more simple way getting things done and much more efficient ways of getting them done from that perspective, you know for me. It always comes down to how we prioritize we're going to prioritize and priorities that we have in this company and I talked about those projects.
Speaker Change: We can focus on those and really not have any other of the other investments kind of play out we can control expenses really well and continue to generate positive operating leverage as we get revenues to start to grow again.
Speaker Change: Sorry, and one less tickets that question be view what is the do you have any estimate on what that would be for this year.
Speaker Change: We earned 100% sure, but I would say 20, plus or minus would be our best estimate right now.
Speaker Change: Thank you.
And that does conclude today's question and answer session I will now turn the call back over to Brian Clark for closing remarks.
Brian Clark: Thanks, Michael and thanks, everyone for participating in our call today. If there are any follow up questions. You can call our Investor Relations Department at 71684 to 5138. Thank you again and have a good day.
Speaker Change: This does conclude today's program. Thank you for your participation you may now disconnect.
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Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Hum.
Speaker Change: [music].