Q4 2024 First Horizon Corp Earnings Call
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Good night!
Prika: Good morning and thank you all for attending the 1st Horizon 4th Quarter 2024 Earnings Conference Call. My name is Prika and I will be the moderator for today.
Prika: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Tyler Craft, Head of Investor Relations at First Horizon Bank. Thank you. You may proceed, Tyler.
Hope Dmuchowski Hope Dmuchowski Hope Dmuchowski
Speaker Change: Thank you, Brika. Good morning. Welcome to our fourth quarter 2024 Resolve conference call. Thank you for joining us.
Speaker Change: Today, our Chairman, President, and CEO, Brian Jordan, and Chief Financial Officer, Hope Dmuchowski, will provide prepared remarks after which we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Thomas Hung, here to assist with questions as well.
Speaker Change: As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties. Therefore, we ask you to review the factors that may cause our results to differ from our expectations on page 2 of our presentation and in our SEC filings.
Speaker Change: Additionally, please be aware that our comments will refer to adjusted results which include the impact of notable items. These are non-GAAP measures so it's important for you to review the GAAP information in our earnings release and on page 3 of our presentation.
Speaker Change: And last but not least, our comments reflect our current views and you should understand that we are not obligated to update them. And with that, I'll hand it over to Brian.
Brian Jordan: Thank you, Tyler. Good morning, everyone. Thank you for joining our call.
Brian Jordan: Before I get into our 2024 results, I express our condolences to the victims, families, and first responders in New Orleans who were affected by the senseless act of violence that occurred in the early hours of 2025.
Brian Jordan: First Horizon has deep roots in New Orleans, and we are proud of the courage, compassion and resiliency the community has shown.
Brian Jordan: At First Horizon, we pride ourselves on being here for good, whether it's in response to the hurricanes we've seen across our footprint, including last year in Florida, western North Carolina, and eastern Tennessee, or tragedies like this one in New Orleans.
Brian Jordan: On slide 5, we have shared some of the financial highlights from this year. We ended 2024 with strong momentum, delivering EPS growth in the fourth quarter through margin expansion, counter-cyclical fee income growth, and strong credit performance.
Hope Dmuchowski: Hope will walk through the quarterly results in more detail in a moment.
Hope Dmuchowski: As we look back on the full year, you can see the benefits of our diversified business model. We grew adjusted EPS by 12 cents or 8% from the prior year.
Hope Dmuchowski: We achieved an adjusted return on Tangible Common Equity of 12.6% through continued strong performance from our banking franchise and positive trends in the counter-cyclical businesses.
Hope Dmuchowski: We maintained a strong net interest margin of 3.35% despite declining interest rates in the back half of the year.
Hope Dmuchowski: Additionally, our counter-cyclical businesses contributed an incremental $55 million to pre-provision net revenue.
Hope Dmuchowski
Speaker Change: We continue to attract new clients and retain existing relationships, growing average loans by over 3% and deposits by more than 2%.
Speaker Change: Over the year, we returned over $930 million of capital to shareholders through dividends and share repurchases.
while maintaining robust levels of capital.
Hope Flanders, Hope Dmuchowski
Brian Jordan: I am thankful for the dedication of our associates that our associates showed this year as they continue to deliver value for our shareholders, our clients, and our communities.
Hope Dmuchowski: With that, I'll hand the call over to Hope to run through the financial results in more detail. Hope? Thank you, Brian. Good morning, everyone.
Hope Dmuchowski: Our adjusted return on Tangible Common Equity of 13.3% improved from the third quarter.
Hope Dmuchowski: Net interest income was up $2 million this quarter, as our focused repricing efforts resulted in a 34-basis point reduction to interest-bearing deposit costs, which offset the impact of lower short-term rates on loan yields.
Hope Dmuchowski: We continue to see outstanding credit performance from our portfolio, with net charge loss of 8 basis points and $10 million of provision expense.
Hope Dmuchowski: The ACL to loans ratio decreased slightly to 1.43%, mostly due to the net benefit of a slightly more favorable economic outlook.
Hope Flanders, Hope Dmuchowski
Hope Dmuchowski: Even as we utilize $163 million of capital on share repurchases and $69 million of after-tax losses on an opportunistic securities portfolio restructuring, which I will touch on more on the next slide.
Hope Dmuchowski: On slide 7, we cover the notable items in the quarter, which reduced results by $0.13 per share. Fourth quarter pre-tax notable items include
Hope Dmuchowski: A $91 million pre-tax loss, which is the $69 million of after-tax loss noted on the prior slide.
Hope Dmuchowski: Related to opportunistically deploying a 10 basis points of capital to restructure our securities portfolio to maximize go-forward returns and shorten the duration.
Hope Dmuchowski: We sold approximately $1.2 billion of securities with an average yield of 1.9% and reinvested at a 5.1% yield.
Hope Dmuchowski: Going forward, the incremental annual impact to NII is expected to be approximately $35 million, resulting in an earn-back period of around 2.5 years.
Hope Flanders, Hope Dmuchowski
Hope Dmuchowski: We also had $3 million of restructuring expenses associated with the ongoing operational efficiencies we continue to implement. And lastly, a $1 million credit to expenses that are the result of a revision to the FDIC assessment.
Hope Dmuchowski: On slide 8, you will see that NII increased $2 million versus the prior quarter, as decreased deposit pricing mitigated the impact of declining short-term rates on loan yields.
Hope Dmuchowski: Margin expanded by 2 basis points from last quarter to 3.33%, driven by a 34 basis point decline in average interest-bearing deposit costs, which more than offset a 28 basis point reduction in average loan yields.
Hope Flanders, Hope Dmuchowski
Speaker Change: I am extremely proud of what our bankers achieved this quarter, working with our clients to price deposits in a changing rate and competitive environment. We retained 95% of the $18 billion of promotional deposits and CDs which repriced in the fourth quarter while achieving a 97 basis point reduction in the weighted average rate.
Speaker Change: We expect to see an approximate $35 million pickup in net interest income as a result of the portfolio restructuring executed in the fourth quarter.
Speaker Change: On slide 9, we demonstrate our continued ability to attract new clients, retain relationships, and manage funding costs.
Speaker Change: Period end balances were relatively stable, with a $1 billion decrease being driven by the payoff of $1.1 billion of brokered CDs.
Speaker Change: The average rate paid on interest bearing deposits decreased to 3.10% down from the third quarter average of 3.44%.
Speaker Change: Similarly, the spot rate was 2.80% at the end of the year down over 50 basis points from 3.33% at the end of September.
Speaker Change: As I mentioned moments ago, we had tremendous success in retaining and repricing our maturing promotional rates, achieving almost 100% beta on those funds while retaining 95% of the balances.
Speaker Change: This continues our trend from 2023 of successfully reducing deposit rates on promotional accounts as we continue to acquire clients, retain balances, and deepen relationships.
Speaker Change: The pricing focus resulted in a 56% interest-bearing deposit beta since Q3.
Hope Flanders, Hope Dmuchowski
On slide 10, we have an overview of loans.
Speaker Change: Period end loans were up slightly from the prior quarter as loans to mortgage companies and C&I saw moderate increases offset by commercial real estate payoffs.
Speaker Change: We are excited about the market share gains we have seen in loans to mortgage companies. We are a lender of choice in the market as our steady commitment to the business provides stability to our clients.
Speaker Change: In 2024, we opened and expanded lines totaling $1.4 billion for new and existing clients.
Speaker Change: This has resulted in an increase of over $400 million in average balances from third quarter despite the impact of low origination volumes in the mortgage industry and seasonality which typically reflects a volume decline in the fourth quarter.
Speaker Change: Commercial real estate balances declined modestly as clients successfully refinanced in the permanent market at maturities.
Speaker Change: As expected, loan yields were down 28 basis points from Q3 due to the impact of lower short-term rates on our 56% index portfolio.
Speaker Change: That impact was slightly offset by continued improvement in the Fixed Rate Book and Loans to Mortgage Company Growth, which is a higher-yielding loan book.
Speaker Change: On slide 11, we take a look at our fee income performance for the quarter.
Speaker Change: Fee income, excluding deferred compensation, decreased $5 million from the prior quarter. Fixed income continued to see improvements as a falling short-term rate environment and a more favorable yield curve in the fourth quarter provided more demand for that business.
Speaker Change: Average daily revenue increased to $659,000, up 11% from last quarter, driving a $3 million increase in fee income.
Speaker Change: As we completed key run-the-bank technology investments in 2024, we introduced changes related to overdraft charges that resulted in a $4 million reduction to service charges and fees in the fourth quarter, which we expect to remain in our run rate. The remainder of the service charges reduction is expected to be isolated to this quarter.
Speaker Change: primarily driven by a $10 million contribution to the First Horizon Foundation.
Speaker Change: Personnel, excluding deferred comp, was down $3 million from last quarter as a true-up to annual incentives offset increases in incentives on higher commission-based revenue.
Speaker Change: Occupancy and equipment expense was up $3 million this quarter, which was driven by incremental software costs associated with our strategic technology investments.
Lastly...
Speaker Change: Other, non-interest expense was up $16 million, with the two largest items being the $10 million contribution to the Foundation, as well as the expenses associated with customer incentives as we continue to see success in attracting and retaining new-to-bank customers.
Speaker Change: I'll cover credit on slide 13, which continues to perform very well.
Speaker Change: Net charge-offs decreased by $11 million to $13 million, or 8 basis points of average loans, which continues to be well below industry levels.
Speaker Change: Loan loss provision was $10 million this quarter with our ACL to loans ratio decreasing one basis point to 1.43 percent as the net impact of the economic outlook was slightly more favorable compared to recent quarters.
Speaker Change: Non-performing loans increased by four basis points from the third quarter, driven by the continued impact of higher-for-longer interest rates and slower-than-anticipated multifamily lease-ups.
Speaker Change: Within the MPL portfolio, we continue to be encouraged by the trends as more than 60% of commercial MPLs are not past due on payments.
Speaker Change: Overall, we are pleased to see our strong underwriting and servicing proven out in our results over the cycle.
Speaker Change: On slide 15, we'll talk through our 2025 Outlook, which is unchanged from what we shared in December.
Speaker Change: Our guidance was provided in December incorporating the forward curve which had three rate cuts.
Speaker Change: However, we provided guidance ranges to accommodate for a range of possible interest rate and economic scenarios. Our balanced business model creates a resilient earning stream across economic environments and we are well positioned to deliver on our 2025 guidance.
Speaker Change: Our revenue guidance is flat to up 4% as we see our counter cyclical businesses as a natural hedge against our asset sensitivity.
Speaker Change: If we see incremental declines in interest rates, those businesses offset NII pressure, whereas less rate cuts result in higher NII.
Speaker Change: Continuing with our guidance, adjusted expenses are expected to increase between 2% and 4%.
Speaker Change: As we bring on incremental run rate from the implementation of our technology investments, the operational efficiencies we have identified this year are going to help offset that cost.
Speaker Change: If we see a significant pickup in fixed income and mortgage production, variable compensation could push us to the upper end of the range, though we remain committed to continuing to identify efficiencies to help offset that cost pressure.
Speaker Change: For net charge-offs, we remain confident in our disciplined underwriting standards and proactive approach to managing credit. Our guidance reflects a range of outcomes consistent with our strong performance in 2024.
Lastly, we are committed to deploying capital and prior...
Prioritizing Organic Client Growth First
Speaker Change: But, with the ability to use our share repurchase authority to return excess capital to shareholders.
Hope Flanders, Hope Dmuchowski
I'll wrap up as we turn to slide 16.
Brian Jordan: Our focus remains on delivering consistent returns to our shareholders, and I am certain that the actions we are taking will position us for a successful 2025 and beyond. And with that, I'll give it back to Brian.
Thank you, Hope.
Brian Jordan: Our fourth quarter performance rounded out a solid year for First Horizon, demonstrating the strength and stability of our franchise.
Brian Jordan: I agree with Hope that we have incredible momentum carrying us into 2025 and I'm excited to see us profitably grow this extraordinary franchise and improve shareholder returns.
Brian Jordan: We celebrated our 160th anniversary last year, which was made possible by the continued dedication of our incredible associates.
Brian Jordan: Thanks to each and every one of our team for all that you do for our shareholders, our clients, our communities, and for each other.
Brian Jordan: I believe that the people of First Horizon are the true difference maker for our unparalleled banking franchise and will be the reason that 2025 will be another successful year.
Bricka, we can now open it up for questions.
Thank you, Brian.
Brian Jordan: We will now open up for the Q&A session. If you would like to ask a question please press star followed by 1 on your telephone keypad.
Brian Jordan: If for any reason you would like to remove that question, please press star followed by two
Brian Jordan: and again to register for a question please press star 1
Brian Jordan: We will pause here briefly for a second while questions are registered.
Speaker Change: We have the first question from Michael Rose with Raymond James on the line.
Hope Dmuchowski
Michael Rose: Hey, good morning everyone. Thanks for taking my questions. Understanding that you guys did the the securities portfolio restructuring, but the guidance is relatively the same, if I think I heard you right.
Michael Rose: you know, at least last, you know, before you gave the update this quarter.
Michael Rose: you were kind of contemplating, you know, positive operating leverage would be a little bit more challenging. Seems like with the restructuring it'll be a little bit easier.
Michael Rose: But does that give you the flexibility to maybe accelerate some of your investment priorities now that you have this kind of extra $35 million a year in interest income? Or would you expect positive operating leverage to maybe widen out here? Thanks.
Michael Rose: Michael, we feel that we have a good approach to expense investments back in the company, as we introduced 18 months ago a three-year, $100 million investment back in technology, as well as investments into our businesses. We're about halfway through that, and I don't see if there's anything on the horizon that would have us add incremental investments into that. We have done a great job managing costs and structuring what we need for the next couple years.
Michael Rose: As we talk about operating leverage, you know, for us, we really talk about being PPNR positive and PPNR growth year over year. As I mentioned in my prepared remarks, depending on the mix of where the revenue comes from, we could see expenses hit the higher end of the guidance from commission businesses.
Hey, Michael. Good morning.
and our ability to create positive operating leverage as you...
Speaker Change: Directly voted and hope commented. We rolled these these ranges out for 2025 and early December Timeframe this does give us more confidence
Speaker Change: There are an awful lot of moving parts in terms of our ability to forecast. We've got a rate curve that still shows three declines.
Speaker Change: and we believe with our balanced business model, if rates don't go down that much, you'll see.
So, it's one of those things where...
Speaker Change: We didn't try to put a fine point on the ranges. We think that's still an appropriate way to think about our earnings capability or ability for 2025.
Speaker Change: Very helpful. And then maybe just as my follow up, if you could just.
Speaker Change: you know, kind of discuss, you know, I saw the comments.
Speaker Change: about Warehouse this quarter and the benefit from share gain. It was obviously a very positive surprise.
Speaker Change: Can you just talk about the prospects for that business and then just in your core banking business on the commercial side, are you starting to see anything more than just optimism around, you know, pipelines building? I mean, would you expect utilization rates to maybe pick up a little bit from here? Just trying to get a sense for what the demand schematic looks like. Thanks.
Speaker Change: Yeah, this is Brian. I'll start and then Tom can pick it up from there. First, with mortgage warehouse lending, we were very pleased with the efforts over 2024 and our ability to gain some share. And it did show up in fourth quarter. As you know,
Speaker Change: We still are seeing a mix in the portfolio, I think it's about 26% or so that is re-fied a day, so that would imply 74% in purchase money, so it's going to be driven by the selling season.
Speaker Change: But we are seeing good trends there and we are pleased with our ability to grow share.
Speaker Change: Over the broader commercial markets, pipelines have started to pick up a bit.
Speaker Change: We're hearing very positive commentary from across our footprint and customers.
Speaker Change: I think there's still a little bit of slowness until we get through the presidential transition early next week and policy starts to take shape, but we're seeing some optimism which we think is encouraging for the overall outlook for 2025.
Speaker Change: We've also been remarkably consistent throughout the cycle. We've continued to support our customers, our industry, and that is really showing up in our recent results.
Speaker Change: I think Hope O'Brien mentioned we had about $1.4 billion in increases in 2024. Over half of that came from new to bank. And so I think that really speaks to the fact that we're capturing market share because of our expertise, but also our consistency in that cycle. And elsewhere, we are starting to see some pipeline build. It's more in kind of the earlier stage pipelines, but we're seeing good momentum elsewhere as well.
Hey, thanks for taking my questions. Appreciate the color.
Thank you.
Your next question comes from John Arstrom with RBZ
Thanks, good morning.
Morning, John.
Thank you. Bye bye.
Hope Dmuchowski: Hope, maybe a question for you, can you talk a little bit about
Hope Dmuchowski: near-term margin expectations. It feels like you have some momentum. You've got the restructuring benefit, lower deposit rates.
Maybe less cuts.
Hope Dmuchowski: You know, maybe a little better warehouse balance starting point, but do you expect some continued momentum in the margin from here?
Hope Dmuchowski: I'm just curious on some of your kind of near to medium-term thoughts.
John, we feel really good about how Q4...
Hope Dmuchowski: performed on margin. We had, you know, three rate cuts of 100 basis points, the first one coming at the end of Q3. So we did not have that, you know, we had a full quarter of that plus the two successive, and we were able to offset that with deposit costs.
Hope Dmuchowski
Speaker Change: Whether there's one or three cuts, or I saw a Wall Street Journal article that started talking about increases, I do believe that our margin will hold up well. I think we're heading into an environment today where we're just not sure what it's going to look like, you know, to give you exact guidance on where we think, you know,
Speaker Change: The successive quarters could be as the forward curve has moved so significantly in the last five days.
Speaker Change: Okay, but it sets up pretty well for the first quarter, I guess, is my...
Speaker Change: is my point. It feels that way. Is that is that sure? Oh, absolutely. We in my prepared remarks, John, I talked about where our spot rate was down. So the average deposit cost.
Hope Flanders, Hope Dmuchowski
Speaker Change: We have definitely seen a slowdown in competition, which Brian and I have talked about previously at the end of the year, but we believe our company has demonstrated the agility to manage margin through the cycle regardless of increasing or decreasing rates, and that our margin is probably pretty stable where it's at within some single-digit basis points.
Speaker Change: As I said here, no rate cut in January. March doesn't matter very much on a quarterly basis. It would have more impact in the second. So we think the momentum we saw in the fourth quarter is likely to continue into the first.
Michael Rose: Okay, that's helpful. Good. And then Brian, very big picture for you, but what are you expecting or hoping for on regulatory changes and what would be good for First Horizon? Thanks.
Yeah
I'd put it in the category of
Michael Rose: where we are in terms of asset size. I've talked fairly often and publicly about the significance of the cliff of crossing 100 billion dollars in assets becoming an LFI and things like TLAC are a perfect example of that and my hope is is that
that as the
Michael Rose: Trump administration gets into place that people will step back and look at
Michael Rose: The legislation passed in 2155, I think it was 2018, and really differentiate based on riskiness to the financial system. My hope is that the tiering that's in place today
Michael Rose: is maintained and maybe even further adjusted because I think there's a significant cliff that doesn't need to exist.
Michael Rose: We're an important part of the financial system, but our risk profile does not really change between 80 billion and say 150-200 billion dollars in assets So I just think the cost structure ought to reflect that and that's probably if I have a
A carryover Christmas list, that would be on it.
Yeah, okay, thank you.
Sure thing. Thank you.
Your next question comes from...
Ibrahim
Poon Ahluwalia with Bank of America on the line
Hey, good morning.
We're the neighboring.
Speaker Change: And where are the obvious areas where you think like lending could pick up over the next three to six months? I mean, I'm assuming some of...
Speaker Change: The Administration's Agenda on Domestic CapEx is more of a 26th event by the time we see that in bank lending, but wondering if there are two or three areas where you think client utilization in certain industries, etc. where we could see a bit more immediate pickup over the coming months.
Hope Dmuchowski
Yeah. Um.
Speaker Change: So we're looking for something, you know, low single digits, maybe
Speaker Change: Marginally mid-single digits in terms of loan growth expectations for 2025.
Our outlook is tempered by we think that
Speaker Change: In all likelihood, commercial real estate was likely to pay down more than it is to build in 2025 simply because of where we are in the cycle and projects that have been in the construction phase, getting to the mini-perm or permanent markets.
I think in the near term, as...
Speaker Change: As pipelines are starting to emerge, you're starting to see some inventory build in certain areas, but I think it'll largely be commercial-oriented and infrastructure-oriented type investment.
Speaker Change: Ibrahim, I think, you know, we've talked about this a couple times before, but there's a couple levers, the first being.
Speaker Change: But the other two parts are credit. We've had to build a, you know, a high level of provision the last two and a half years. And as you can see, our charge offs are holding up very well. So as we see provision, the sooner we can see provision normalizing.
Speaker Change: that will go hand-in-hand with that economic environment stability will help, and that leads to the third part, which is we're holding 11% CET-1. Brian and I continue to say we'll evaluate it on a regular basis, and as we see stability in the economic outlook and feel comfortable, we'll bring that down.
Speaker Change: To summarize, the first level lever is revenue growth, the second is when provision starts to normalize, and then our ability to get down to that lower end of our capital range of 10.5 will be the biggest predictors of timing.
Hope Dmuchowski: and as Hope said, one of the key levers in terms of our capitalization.
Hope Dmuchowski: which is dependent on what's going on in the economy and the world around us is in our control, but we do believe we're holding excess capital and we can repatriate that to shareholders through our repurchase authorizations, and so that can be a meaningful start to getting those return levels up.
That's helpful. Thank you.
Thank you
Speaker Change: Thank you. We now have the next question from Jared Shaw with Barclays Capital. Please go ahead.
Jared Shaw: Hey, good morning, everybody. I guess maybe sticking with the capital question.
Jared Shaw: you know, even lower than 10.5%. You know, I think when you look at what sort of drove the industry up to that, it was, you know, more credit concern, more liquidity concern, a different regulatory backdrop. Is there a time frame where you could see that below 10.5%?
Yes, sure, I think, when we look at capital,
We talked about it in terms of CD1, but
Jared Shaw: still run stress testing and disclose it even though it's not required, and we have conversations with our board about what the right capital levels are.
Excuse me.
Jared Shaw: Rule of thumb, that 10.5 area is probably not a bad through-the-cycle way to think about us.
Speaker Change: Okay, all right, thanks. And then as my follow-up, just on credit, you know, good trends on the charge-off level. Can you give us just a little color on what drove some of the increase in NPLs on the CRE side, and how we should think about the allowances as a ratio to loans?
going forward from here.
Speaker Change: and be sure we'll be here. I think that's the best.
Speaker Change: Yeah, absolutely. So, as you noted, we had a slight increase in NPL, sorry, in NPL's four basis points. That was...
Speaker Change: driven predominantly by Cree. I think in Hope's opening comment, she mentioned what that's really driven by is specifically we saw just a slower absorption in multi-family in particular.
Speaker Change: Performance remains very good. NPL still has over 60% current on payments, and so that's what gives us confidence.
Speaker Change: You know that we've been vigilant and remaining on top of our portfolio.
just a slightly more favorable economic outlook.
Speaker Change: where currently our forecasts are based on three rate cuts this year. What we do in terms of reserve and coverage going forward is going to be dependent obviously on our portfolio performance, but also as we revise our economic outlook, which is fairly volatile at this point, so it's a little harder to pin that down.
Great, thanks very much.
Thank you.
Speaker Change: Thank you. We now have Chris McGrathie with KBW on the line.
Oh great, good morning.
Speaker Change: Brian or Hope, on the revenue guide, the high end of the revenue guide, is that a scenario where you get the current forward curve? I know you have three cuts in your guide, but would that be, would that map to a no cut or maybe one cut scenario?
That is a help, but we also need to see
a lot to talk about.
Hope Flanders, Hope Dmuchowski
Speaker Change: Okay, great, that helps a lot. I missed the prior question on the timing of the bond restructuring. Could you just remind me when the quarter that happened and then also do you have any, I know you provided a spot deposit cost, but do you have the spot yield on the bond portfolio given the restructuring?
Speaker Change: I do not have the spot yield on the bond portfolio with me, Chris. We did the bond structure at the end of Q4.
Thank you.
Speaker Change: Hi, good morning. Thank you for taking my question. Maybe just to follow up on the fixed income business, I know in the fourth quarter it sounded like there were some upweaks and downweaks with ADR trending between
Speaker Change: a nice step up in total. Can you give us some color on how that trended into the end of the quarter and where you expect that to trend from here?
Yeah, I'll start.
Speaker Change: The year started off actually pretty good. The number was, you know, in the mid-650s last week and last week was a little bit unusual in that you had the day the markets were closed in remembrance of President Carter.
Hope Dmuchowski Hope Dmuchowski
Speaker Change: unless something really happens to interest rates to upset the market's view of fixed income, we think we can have a pretty decent quarter and that momentum will continue into the first quarter as we move forward from here.
Speaker Change: Perfect, thank you. And then also following up on the deposit cost repricing, obviously some really strong pricing into the quarter end to get to that spot right at the end of December.
Speaker Change: Does the shifts in the forward curve impact how you're thinking about pricing from here going forward? Do you think you can maintain that downward repricing trajectory that you've generated to this point?
Hope Dmuchowski
Hope Flanders, Hope Dmuchowski
Boop.
Hope Flanders, Hope Dmuchowski
Yeah, I think.
From here Nick, it's less likely. The movement of
Speaker Change: of the Fed in terms of short-term rates will impact it, but I also think market dynamics, the...
Speaker Change: Impact of what competitors are doing, given that we're not playing solitaire when it comes to setting rates, will influence it as well.
but we also...
Speaker Change: So I think there are a lot of variables and it's a whole lot more complex and looking at what the implied rate curve might do
Understood. Thanks for taking my questions.
Thank you.
Thank you. We now have Anthony.
Ilyan with JP Morgan, please go ahead when you're ready.
Anthony Ilyan: Hi, everyone. Just to follow up on the deposit cost question, you had in one of the slides your spot rate of 2.8%, which is about 30 base point lower than the quarter's average. I guess, does that fully reflect the benefits you expect from the Fed rate cuts in September, or are there any more incremental declines in deposit costs you would expect from here just from those cuts at the end of last year?
Anthony Ilyan: It's really hard to predict, you know, what we think will happen with competition. I think we'll continue to walk back our rates.
Bye.
Anthony Ilyan: It is a changing deposit pricing environment, which we've seen shift, you know, on 30 days, changing economic data last year.
Anthony Ilyan: And so in Q1 last year, we saw deposit pricing come down, and then it picked back up in Q2 as competitors saw the first rate cut move out. But we're going to continue to be disciplined in bringing in new-to-bank clients. For the last two years, we've shown that we can
Anthony Ilyan: Bring in new-to-bank clients early in the year, retain them at 90-plus percent, and walk back rates.
Yeah, it is as a mathematical exercise
Anthony Ilyan: That spot rate would continue down as you have the maturity of 90-day promotional rates or CDs, maturing, things of that nature.
Anthony Ilyan: But as Hope said, there are a whole lot of other variables, so you can't take that and necessarily extrapolate. You can extrapolate it, but you have to layer in what you think a competitive environment is going to do.
Hope Dmuchowski Hope Dmuchowski
Speaker Change: Thank you. And then my follow-up, if your revenue guide comes in closer to the lower end or flat for this year, can you just talk about the levers you have on the expense side for that to come in at the lower end or the up 2% range as well? Thank you.
Hope Flanders, Hope Dmuchowski
Thank you.
Thank you.
Speaker Change: We now have Timur Obaziliev with Wells Fargo. You may begin.
Hope Dmuchowski
Hi, good morning.
Speaker Change: A follow-up question for me on the deposit side, just looking at non-interest-bearing
Speaker Change: still seems to be some pressure within that category. It's been a couple of years in a row now where those balances are declining. Any way you could frame what the excess liquidity remains in that category and how much more potential risk there could be from further remixing out of DDA in 2025?
Speaker Change: Timmer, thanks for the question. We've seen stabilization in our balances the last, you know, two, two and a half quarters. I don't see a lot more of downward migration. The mixed shift, I've said in my prepared remarks, I believe has
Speaker Change: I think, you know, the mixed shift as well as the Fed shrinking the deposit base was what drove that mix so significantly over 2023 and early 2024 and, you know, those factors aren't in play anymore.
Hope Flanders, Hope Dmuchowski
Hope Flanders, Hope Dmuchowski
Speaker Change: Okay, great. And I apologize if this was already touched on, but just looking at the higher rates and the effect on commercial real estate, I guess in the near term, expectations around pay down activity, do the higher rates actually slow the pace of pay downs?
https://thebusinessprofessor.com
Yeah, um
Speaker Change: The high rates have been having more of an effect on pipeline and delaying start of projects.
Speaker Change: In terms of kind of what's already in process and in lease up, it's really more determined by kind of the other perm market. The higher rates obviously have some effect. It's harder to to get into more attractive perm financing, so that's resulting in some shorter term extensions.
Speaker Change: If we do see the rate cuts we're anticipating, you are probably more likely to see more of the completed projects and stabilized projects go into the perm market, so I do expect that we'll likely see more refinances out of the portfolio in that scenario.
Thank you.
Great, thank you.
Speaker Change: Thank you we now have Christopher Maranac with Jenny Montgomery Scott on the line
Speaker Change: Chris, thanks for the question. I'm really excited to announce I have a new general ledger, which will not make our clients' ability to do business with us any better or generate any revenue, but one of our biggest, we had two large projects, one being a general ledger conversion.
Speaker Change: which did complete, and as the CFO, I was excited to see that complete on time.
Speaker Change: People involved in it. So we completed both of those on time in 2024 and are excited to have those behind us
Speaker Change: We have a few large projects coming up that are more client-facing, we talk a lot about the run the bank being behind us and being able to invest and deliver new technology in 2025 and 2026 that improves the client experience, their ability to do business with us and offers them new products.
Speaker Change: that will deliver real benefit to our customers. So I'm really proud of the work that our teams have done this year.
Speaker Change: Great. Thank you both for that color. And it does sound like part of the growth that you have in expenses this year will cover some additional tech spend. I mean, is that a fair impression without getting into too many details?
Speaker Change: Yes, our technology spend, our ongoing investments in our products, our businesses are all embedded within our 2025 guidance. Chris, somebody asked earlier whether we saw the, if we saw revenue pick up, would we add more expenses in to do investments, and I said we had a three-year plan, we were committed to it, and we believe we had everything we needed on that roadmap.
Great. Perfect, Hope. Thanks for reiterating. I appreciate it.
Thank you.
Speaker Change: Thank you. Just a quick reminder at Star 1 to register for any questions. And we now have Brendan Crowley with Robert Ett.
Speaker Change: Hey, good morning, guys. Thanks for taking my questions. I wanted to revisit capital and in particular the restructuring. Obviously, the yield pickup is great here. I'm just wondering if you guys can help us understand your thinking around the trade-off between buybacks and potentially further restructuring going forward, or if it was a one-time event. And if you are considering further repositioning, is there sort of an earnback benchmark that you guys would target?
Well, yeah, so...
In terms of the restructuring,
It was an opportunistic restructuring. We took
Speaker Change: with one, shorter duration and two, better higher quality collateral and better performing collateral.
Speaker Change: Looked at it in an opportunistic sense when we think about our capital and and return to the shareholders I described earlier how we really do a bottoms-up approach. What's the appropriate capital levels?
Speaker Change: because that was reflected in OCI. So that said, we will only be opportunistic in terms of repossessing the securities portfolio. We feel good about how that portfolio is performing. And while there is some residual.
Speaker Change: You know, 800 plus million dollars of shares, common stock, and we will use this excess capital as we generate it, and as we are able to bring down that CET1 ratio. If not through growth, we're going to look to bring it down by repatriating capital to our shareholders.
Speaker Change: but I don't think that should indicate anything about how we're going to deploy capital in the future. We will be opportunistic, but we think there's real value in our stock and we will look to continue to repatriate capital when we can't put it to work in terms of growing loans and customer activity.
Speaker Change: do the restructure. We did share buybacks the whole quarter until we went into our blackout and bought $163 million this quarter, which is the second highest quarter for the year. Trying to target that 11% capital still accreting earnings, we had the ability to do both. And when we ran the math on it, we stayed both in share buybacks and did the restructuring of our portfolio while staying above our near-term target capital.
Speaker Change: Yep, no, that all makes sense. I appreciate the color. And then just as a quick follow-up, I wanted to zoom in on the service charge line item. And I'm just wondering if the Q4 numbers, kind of the run rate moving forward, now that we have the full quarter of updated overdraft charges. And then if there was any ECR benefits and lower rates embedded in the quarter, if you can quantify that, that would be helpful as well.
Speaker Change: And we don't have any other, you know, impact that were in the run rate that would move forward.
Great, thank you.
Thank you.
Speaker Change: Thank you we have no current questions so I would like to hand it back to the CEO Brian Jordan for some closing comments
Brian Jordan: Thank you, Bricka. Thank you all for taking time to join us this morning. We appreciate your interest in our company. If you have further questions, need additional information, or just want to follow up, please reach out to us. Again, thank you for joining us and I hope everyone has a great day.
Brian Jordan: Thank you all for joining. I can confirm that does conclude today's call. Please enjoy the rest of your day and you may now disconnect from the call.