Q4 2024 BankUnited Inc Earnings Call
Melissa Bay, Greta Thunberg, Richard Menzies, Todd introduction
Good day and thank you for standing by. Welcome to Bank United fourth quarter and fiscal year 2024 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during this session you'll need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question please press star 11 again. Please be advised today's conference is being recorded.
Speaker Change: I would now like to hand the conference over to your speaker today, Jackie Bravo, Corporate Secretary. Please go ahead.
Thank you, Michelle.
Jackie Bravo: Good morning and thank you everyone for joining us today for Bank United Inc.'s fourth quarter 2024 results conference call.
Speaker Change: On the call this morning are Raj Singh, Chairman, President and CEO, Leslie Lunak, Chief Financial Officer and Tom Cornish, Chief Operating Officer.
Speaker Change: Before we start, I'd like to remind everyone that this comment contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to, among other things, future events and financial performance.
Speaker Change: Any forward-looking statements made during this call are based on the historical performance of the company and its subsidiaries, or on the company's current plans, estimates, and expectations.
Speaker Change: The inclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved.
Speaker Change: Such forward-looking statements are subject to various risks and uncertainties and assumptions.
Speaker Change: Including those related to the company's operations, financial results, financial condition, business prospects.
Speaker Change: growth strategy and liquidity, including as impacted by external circumstances, outside the company's direct control, such as adverse events impacting the financial services industry.
Speaker Change: The company does not undertake any obligation to publicly update or review any forward-looking statement.
Speaker Change: Whether as a result of new information, future developments, or otherwise.
Speaker Change: A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements.
These factors should not be construed as exhaustive.
Speaker Change: Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2023, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website.
Rajni: With that, I'd like to turn the call over to Mr. Rajni.
Rajni: Welcome, everyone. Thanks for joining us. I know it is a busy earnings day. We'll try to wrap this up in an hour or less.
Rajni: We're reporting an exceptionally strong quarter and a very good finish to the year, a pretty good year for Bank United.
Rajni: The earnings release has been out for the last hour or more, and I'm sure a lot of you have already gleaned through it.
Rajni: Since it's a busy day, and if you don't get to see all of the numbers we've put out and all the supplemental information we've put out, if there's only one page that I would like you to focus on.
Rajni: We would be a new slide that we added in our board deck, which is slide number six.
Rajni: It kind of lays out the progress that we've made as a company, not just last quarter, but over the last year, quarter by quarter.
Rajni: That is, you know, like I said, if you don't read anything else, that's the only page you focus on, you'll get the gist of what we're going to say today.
Rajni: and also we'll provide some guidance for next year as well.
So.
Rajni: What does page six say? And here I will take a little bit of time. It lays out EPS.
Nerms Margin, ROA and ROE
Rajni: For every quarter over the last five quarters and and and
Speaker Change: The actual numbers are important, but what's more important is the trend that you will see in those numbers. And by the way, these numbers have been adjusted for the FDIC special assessment charge in fourth quarter of 2023.
Speaker Change: Our EPS grew from, you know, fourth quarter of 23 was 62 cents, first quarter was 64, second quarter was 72, third quarter was 81, and we're just announcing today 91 cents.
Speaker Change: Likewise, our margin, which fourth quarter of 23 was at 260, actually went down a little bit to 257, that's a seasonal adjustment, went up to 272 to 278 to 284.
Speaker Change: That's what we are announcing today. ROA was 52 basis points back then, went up to 54 to 61 to 69 to 78, which is what we're announcing today. And ROE, which was at 7.3% then,
Speaker Change: Stated 7.3 in the first quarter to 8% in the second quarter to 8.8 in the third and 9.7 this quarter.
Speaker Change: And no matter how you look at this, this has been a phenomenal year of delivering on the things that we set out to deliver that we talked to you about this time last year.
Speaker Change: I'm happy that we're significantly above where the consensus was, and 91 cents is better than the 81 cents that we reported last quarter, so great progress over the quarter as well.
Speaker Change: Now, the place where we really outperformed, even to our own expectations from three months ago was really on the margin.
Speaker Change: We thought margin, based on our internal assumptions, was going to be flat at best this quarter, but we actually did much better. We came in six basis points higher at 284.
Speaker Change: from 278 last quarter. And that's mostly because on the deposit side, we did much better than we thought we would. You know, fourth quarter is a seasonally difficult quarter because of certain of our businesses do lose deposits, and they did lose deposits this quarter.
Speaker Change: But our other businesses made up for those and the deposit story came out much better.
Speaker Change: So, quickly going through the deposits, the cost of deposits, you know, came down very nicely. It has declined by 34 basis points to 272 from 306 last quarter. Cost of interest-bearing deposits actually came down 45 basis points to 375. It was 420 last quarter.
Speaker Change: And on a spot basis also, we came down to 263 from 293.
Speaker Change: Now, despite all the seasonal headwinds that I just mentioned in some of our businesses, average NIDDA, instead of going down, actually went up. It was up $173 million, which is what feeds into the better-than-expected margin story here.
And, you know, that, that, that, you know,
Speaker Change: Just a shout out to all our business lines who contributed to that, so I know a number of them are on the line.
Speaker Change: Ending NIDDA was basically flat, was declined only by 19 million. So, you know, much better than what we were expecting.
Speaker Change: We're down $101 million, mostly because of the runoff that we've already talked to you in RESI and some of our non-core portfolios like leasing and franchise finance.
Speaker Change: So if I look back over the year, NIDADDA grew, so non-interest DDA grew by 781 million dollars for the year. Total deposits grew by 1.3 billion, non-brokered grew by 1.4 billion. And wholesale funding, which has also been a big priority for us taking it down, was down 2.3 billion for the year.
Speaker Change: Core CNI and CRE grew by $470 million for the year, and RESI and non-core loan portfolios declined by $959 million.
Speaker Change: A loan-to-deposit ratio now stands at 87.2%. A year ago, it was close to 93%. I think it was 92.8%.
Speaker Change: Credit still looks solid. I think this year we clocked net charge offs at 16 basis points for a commercial bank that I still think that is a fantastic number.
Speaker Change: Capital, set one is at 12%, and if you include the AOCI and then run it again, it's at 10.9%.
Speaker Change: TCE to TA ratio is now at 7.8 and book value per share keeps going up, it's at $36.61.
Speaker Change: So quickly, before I hand it over to Tom and Leslie, I want to talk about, you know, this is the time we give guidance for the year. But before I give guidance for this year, let me just kind of step back, you know, a year ago, what did we say and where did we end up?
Speaker Change: that NIDDA would would grow double digits, we grew at 11.4%. We said total deposits grow mid single digits, so we grew at 5%. We said non-broker total deposits grow slightly more, and yes, they did. We grew at 7%.
Speaker Change: We also said that we would pay down, continue to pay down wholesale funding. We paid it down by $2.3 billion. We guided that the margin would end up in the high twos by the fourth quarter. We ended up at $2.84.
Speaker Change: We said that there'd be a mid-single-digit increase in NII, where it was up 5%. We also said that expenses would be mid-single digits, excluding the FDIC assessment. It came out at 6%.
Speaker Change: Loans, we initially had said that loans will be, you know, total loans will be up low single digits and commercial would be up high single digits.
Speaker Change: There on the commercial side, we missed a little bit. It was a little lighter than what we thought, mostly because the payoffs, which are much harder to predict, were much higher. Production actually came in just fine. It's the payoffs that surprised us.
Speaker Change: And by the way, along this, we also said we will continue to build our ACL, which we did. We started the year at 82 basis points. We ended the year at 92 basis points.
Speaker Change: So in other words, you know, in terms of everything that we said we were able to deliver, it's, you know, makes me very, very happy.
Speaker Change: And it all results in basically ROA, ROE, EPS, all moving as substantially as they have. So this has been a very good year. Now, guidance for next year.
This will feel like a deja vu moment because
Speaker Change: I'm going to give you the same guidance I gave last year.
Which is that
Speaker Change: So no major changes in fundamental strategy. We still want to keep improving the profile of the left side and the right side of the balance sheet to improve our metrics.
for us achieving what we want to.
Unknown Speaker
Speaker Change: NIDDA, you know, we'd like it to grow double digits again.
Total deposits should grow mid-single digits.
Speaker Change: And, you know, there's not much in terms of paying down wholesale, we pay down so much of it. But on the marginal, probably pay that down as well. Loan growth, again, same
Speaker Change: guidance as last year that non-core and resi will continue to decline and commercial and CRE will grow high single digits and total growth will end up somewhere in between.
Expenses, similar to last year, mid-single digits growth in expenses.
Speaker Change: And on margin, sometime later this year, we should get past 3%. That's what we're going, you know, it's hard to say exactly when it'll happen, but it'll be in the later half of the year that we should get to 3% and hopefully beyond that.
Speaker Change: So, if we are able to deliver all those things the way we've laid out, you know, I'll be able to hopefully come to you again next year and show you a chart like the one we're showing on page six and even better numbers at this time next year.
Speaker Change: I do want to remind that there is seasonality in the business, and Leslie will probably put a finer point to it, both in our deposits and our lending. So just be aware of that. You know, deposits are generally much stronger in the first half of the year, not less so the second half.
Speaker Change: and loans are generally the second, third and fourth quarter, first quarter being a difficult one to underwrite new business in given the end of the year stuff.
Speaker Change: But other than that, am I missing anything, Leslie, Tom? No. All right, I'll turn it over to you, Tom. Okay. Thank you very much.
Tom Cornish: So let's talk a little bit about loans first as Raj mentioned.
Tom Cornish: In total, loans were down by $101 million this quarter. Core CRE and C&I segments grew by $185 million. Mortgage warehouse was up by $14 million. Well, as Raj mentioned, the RESI franchise, equipment, and municipal finance.
We're down by a combined $299 million.
Tom Cornish: For the fourth quarter, the core commercial segments grew by 1.2%.
for about 5% on an annualized basis.
I would say that for the course of the year.
Tom Cornish: We were pretty happy with production all year long. It was a good production year.
really across all of our C&I segments.
Corporate Banking, Commercial Banking, Small Business.
and Cree. As Raj mentioned, we did
Tom Cornish: have some impact from payoffs this year that kind of ebbs and flows.
Tom Cornish: It's difficult to predict, but when we look back at the year.
Tom Cornish: and the quarter from the total production perspective, we're very happy and think that will continue into the first quarter as we see, you know, the pipelines.
Tom Cornish: On a year-to-date basis, the C&I and Cree portfolios were up a combined $470 million. Mortgage warehouse was up $153 million.
Speaker Change: And as Raj mentioned, residential was down $628 million, franchise equipment, municipal finance all declined by a combined $331 million. And all of this was consistent with our repositioning strategy.
Tom Cornish: On the left hand side of the balance sheet. Overall, we're still
Tom Cornish: optimistic about seeing good C&I growth and good Cree growth next year. We continue to operate in very favorable markets.
Tom Cornish: And I think the overall economy as we see it is going to be very good in the markets and the segments that we operate in. So we continue to be encouraged by the pipeline that we see in growth opportunities for 2025.
Tom Cornish: A few minutes on Cree, refer you to slides 12 through 15, the supplemental deck.
Speaker Change: Our CRE exposure totaled 26% of loans and 169% of the bank's total risk-based capital at 1231.24. So while we had good growth, we still have a modest
Speaker Change: to $100 billion bank range was 35%. And the medium ratio of created total risk based capital was 222%. As you can see, while it's an important part of our bank, it's still compared to peers, you know, lighter from a balanced perspective.
Speaker Change: At December 31st, the weighted average LTV degree portfolio was 55% and the weighted average DSCR was 1.76.
Speaker Change: 54% of the portfolio was in Florida, 25% was in the New York tri-state area. So as it relates to office,
Speaker Change: We continue to monitor that, you know, carefully. We are seeing positive signs.
Speaker Change: incrementally across the board in leasing activity, in abatement roll-offs, and even a little bit in the last quarter in terms of shortening of abatements.
on new leases, and everybody reads the book.
Speaker Change: The general trend that a lot of companies have towards going back to the office
So we have been over, you know, this portfolio about
Speaker Change: 9000 times analytically. And I think at this point, you did see one one tick up in a non performing loan for the quarter. But for the most part, we have identified
Speaker Change: challenge to it. We've been working with a small number of loans that are providing a challenge.
Speaker Change: very closely. Generally, we have quality sponsors. And we think that while there could be some lost content over a period of time, we think of a relatively modest to the company, but the rest of the portfolio, you know, continues to perform.
Speaker Change: you know very well as it relates to office and as it relates to Crete. The data points are at December 31st.
Speaker Change: We had a total office portfolio of $1.8 billion, 57% of that was in Florida, predominantly suburban, 23% in the New York Tri-State area. Of the $1.8 billion, $350 million, or 20%.
Speaker Change: of the Total Pre-Office Portfolio was medical office, that's really the only component that grew.
last year.
The construction portfolio includes.
Speaker Change: was 1.57 at December the 31st. So as you can see, 1.57 is a pretty good number. It's been pretty stable. You know, at that number for most of the year, it's actually up one basis point from the previous quarter. So we are seeing, you know, more stability, more positive trends, abatements.
Speaker Change: Rolling off and things that are at least in all of the major markets that we're in generally favorable 528 million of the office loans mature in the next 12 months
Speaker Change: $277 million of this is fixed rate. Rent rollover in the next 12 months is only 12% of the portfolio.
Speaker Change: With respect to the stabilized New York tri-state portfolio, 41% is in Manhattan. This is approximately $169 million and has a 95% occupancy and a lease rollover in the next 12 months of 10%.
Speaker Change: As I said, debt service coverage ratios and occupancy levels are showing some signs of improvement.
Speaker Change: and a number of our sub markets, generally what you see in Florida.
in Texas in the southeast.
Speaker Change: is continued strong new to market companies where we see positive leasing activity across the portfolio. Generally, it's new to market companies coming into the market, which is healthy overall for the market. In the Northeast, it tends to be more
Speaker Change: you know, tenants moving from one building to another, not as much new market activity. But again, the majority of the portfolio is in the Florida and Southeast.
Since 2020, we've had total charge-offs.
Speaker Change: and the office portfolio of $8.3 million, so relatively minor, related only to four loans.
Speaker Change: You know, while the exact amount of the ultimate loss content is obviously still to be determined, you know, we see it pretty manageable. As Raj mentioned, we had one non-performing CRE loan increased by $25 million this quarter. It's related to one office loan that was in a substandard
Speaker Change: rating category that we've been following for a long time. This was not a surprise to us.
Speaker Change: Overall, the Cree portfolio can be on a couple of these loans.
Speaker Change: you know, continues to perform very well. On the deposit front, we're quite optimistic getting into 2025. We are a bit seasonal, we do expect to see really nice
Speaker Change: growth in the first two quarters, strong relationship, strong pipelines, new account activity is very good. Raj and I've had the pleasure of attending a couple of wonderful celebrations.
Speaker Change: for teams that have hit great milestones for new relationship activity, new account activity over the last couple of quarters. And I think in general, our overall deposit pipeline, you know, looks very strong heading into 2025. So with that, I would turn it over to Leslie.
Leslie Lunak: Thanks, Tom. To reiterate, net income for the quarter was $69.3 million or $0.91 per share for the year, adjusting out the impact of the FDIC special assessments. Net income grew by 15%, so we're pretty proud of that.
Leslie Lunak: I'm turning to talk a little bit about the net interest margin and net interest income. Net interest income was up $5.1 million or 2% linked quarter. That's 9% on an annualized basis.
Leslie Lunak: The NIM increased six basis points to 284 from 278 last quarter. We guided the NIM being flat for the quarter, and as Raj mentioned, average NIDDA for the quarter exceeded our expectations, growing by $173 million, and we made better-than-forecasted progress reducing the cost of interest-bearing deposits.
Leslie Lunak: In fact, for the period September 1st, 2024 through January 15th, 2025, the realized beta on non-maturity interest-bearing deposits was 81, so we think that's pretty good.
Leslie Lunak: The average cost of interest bearing deposits declined from $420 to $375 while the average cost of total deposits declined from $306 to $272 and the spot rate to $263 from $293.
Leslie Lunak: As you'd expect, the average yield on loans declined from $587 to $560, and the average yield on securities declined from $562 to $531. These are largely floating rate portfolios, so that was really attributable to coupons resetting down primarily.
Leslie Lunak: Looking forward, floating rate assets will obviously continue to reprice down if rates continue to decline. For the fourth quarter, this was more than offset by the reduction in the cost of deposits.
Leslie Lunak: The static balance sheet remains modestly asset sensitive. We do expect the NIM to increase over the course of 2025 as both the funding mix and the composition of assets continues to improve.
Leslie Lunak: As we've been saying all along, while the static balance sheet is modestly asset sensitive, margin improvement is predicated on continued balance sheet transformation efforts. And I think we've delivered on that this year and we expect to deliver on it again next year.
Leslie Lunak: A couple of other things underlying the guidance to an increasing NIM.
Leslie Lunak: We do expect mid-single-digit growth in total deposits, and we think we can again deliver solid double-digit growth in non-interest-bearing demand deposits.
Leslie Lunak: Loans in total probably be up low single digits, but we expect the core C&I and CRE portfolios in the aggregate to be up mid to high single digits.
Unknown Speaker 0
Speaker Change: So those are some of the things that underlie those trends. I will remind you that there's some seasonality in the business.
Generally, deposits are stronger in the...
Speaker Change: First half of the year and we see seasonal headwinds in the back half.
Speaker Change: Loans are the exact opposite. Usually, the first quarter is the lowest quarter from a commercial production perspective, and it ramps up over the back half of the year. As a result of that, margin expansion is a little bit more challenged in the first quarter, and particularly the first quarter of 2025, we're going to have three to four basis points of pressure resulting from the roll-off of some hedges. But we do expect
Speaker Change: to hit to see that 3% by the end of the year. So I would, to summarize all that, I'd say don't get so focused on individual quarters, but let's think about the trend we expect to see over, over the year.
Speaker Change: Turning to provision and reserve, the provision this quarter was $11 million. The ACL to loans ratio decreased from 94 to 92. The reserve was 82 basis points at the start of the year. At the end of the year, the commercial ACL ratio was 137 and the reserve on CRE office was 230.
Speaker Change: The main reason for the decline in the ACL this quarter was net charge-offs. That's how it's supposed to work. You reserve for them and then, you know, the losses materialize. This was partially offset by specific reserves and an increase related to the economic forecast.
Speaker Change: Substantially all the charge-offs we took this quarter related to three CNI loans. As we've said in the past, CNI charge-offs are very idiosyncratic in nature. We aren't seeing any emerging systemic trends of concern at this time.
Speaker Change: As we've said before, we believe a normalized charge-off rate for a commercial bank is probably somewhere in the 20s.
Speaker Change: compared to 16 basis points that we reported for the year. We do think the provision is likely to be a bit higher in 2025 than it was in 2024, given the expected shifts in portfolio composition towards more of a commercial portfolio. So it'll likely continue to move toward that 1% level.
Speaker Change: Non-interest income and expense, nothing really to call out for the quarter that's material in terms of non-interest income or expense. The rail car refurbishment costs that we guided to last quarter of about $8 million did get pushed out into 2025, and I won't try to tell you which quarter because apparently we're not very good at pinpointing that.
Speaker Change: Thank you for joining us. Please find me on Twitter at Leslie Lunak, and if you have any questions, please feel free to email me. Thank you. Bye.
and the ETR to be about 27% going forward.
Speaker Change: I will close with a brief comment on the LA wildfires. We do have some residential exposure in impacted areas. While this is still obviously an evolving situation, the most recent information we have indicates about $80 million of exposure, so not very much.
Speaker Change: In zip codes in identified fire areas, we don't expect to find any instances where the property is either uninsured or underinsured. And so, therefore, we don't expect this will have any material impact on provisioning or lost content.
Yeah.
Speaker Change: With that, I'm going to turn it over to Raj for any closing remarks he wants to make. Yes, I forgot, you know, I wrote down a couple of things that I want to talk about. One, I just usually talk about the environment while giving guidance. So, as you can imagine, you know,
Speaker Change: There is a lot of positive news. There's more optimism on Main Street, not just on Wall Street.
Speaker Change: It's a more constructive regulatory environment for all industries, not just ours. So those are positives.
Speaker Change: I'm comparing this to a year ago, the guidance that we gave you a year ago, we were worried about, you know, was it going to be a recession?
Speaker Change: There was some, you know, probability of a slowdown or a recession. I think whatever that probability is today, it's much lower.
Speaker Change: There's more uncertainty in terms of policy, especially as it relates to trade and the second and third order impact that might have, especially if there are big changes and sudden changes in policy. So we're monitoring all of that and how that will impact risk.
in our portfolio.
Speaker Change: Second, I would say that there is more competition today than a year ago. A year ago, you know, competition really, respecting the lending side, eased off after the Silicon Valley crisis, and we saw a widening of spreads starting in summer of 23. And I would say for the last six months, spreads have been tightening.
Speaker Change: and we expect them to keep tightening into this year. So there's more competition and tighter spreads. There's more uncertainty.
Speaker Change: with the change in administration. And hopefully, all of this will amount to nothing but something that we're keeping an eye on. So overall, I'd still take it than not. One last comment.
Speaker Change: All the progress that you've seen at Bank United, you know, first of all, I'd say don't ever take any one quarter and annualize anything. You should always look at 12-month trends.
Speaker Change: because the business can be episodic, it can be lumpy, no one ratio should stand on its own in a quarter. Don't take any quarterly thing and annualize it.
Second, I would say.
Speaker Change: I'm going to state the obvious, that all the progress you've seen is not the result of any kind of financial engineering. We did not go out.
Speaker Change: and sell loans or take a hit on a securities repositioning or any of that.
Speaker Change: Every investment banker in the world has come to us and talked to us about how they can magically make our margin better and our earnings can look better if we just take some pain now. We haven't done any of that. I know some banks have and that's fine.
Speaker Change: but we haven't done that. So all the improvements you see is just good old blocking and tackling and improving the balance sheet, one asset and one liability at a time.
Speaker Change: So, with that, I will stop and I'll turn it over for questions.
Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster.
Speaker Change: Our first question is going to come from the line of Woody Lay with KBW. Your line is open. Please go ahead.
Hey, good morning, guys.
Morning Woody.
Speaker Change: I appreciate all the components of the guidance but I just wanted to talk about overall NII. If I look at over the past 12 months it looks like it sort of grew in the four to five percent range. Is that a good way to think about it going forward or is there optimism you could come in a little bit above that range?
Speaker Change: Yeah, last year it was up 5%, as you said, Woody, and what we're projecting for next year is mid to high, you know, probably mid to high single digits.
Speaker Change: Okay, maybe shifting over to deposits. Raj, I thought was an interesting comment about the environment changing a little bit. And you reiterated
the sort of same deposit guidances.
Speaker Change: as the previous year, but we are in a little bit of a different environment where a lot of peers are talking up the potential for loan growth. So does that present any challenges related to deposit gathering? And sort of how do you plan to counter those challenges?
So demand deposit growth is not
Speaker Change: I'm not worried about demand deposit growth, right? Because I see pipelines, I see how many mandates we have, and the accounts were opening. So I feel pretty good even looking into the first, you know, couple of quarters, right? It's hard to look beyond that pipeline generally doesn't go beyond six months.
Speaker Change: But in the first six months where we do a lot of our growth, I feel pretty decent about that guidance.
Speaker Change: If there is a lot of competition that suddenly rears up in deposit land, it's going to be more on interest-bearing deposits.
Speaker Change: So that's a little harder, you know, to predict and what's harder to predict is exactly what the price of that will be if demand heats up.
We're not seeing it as of right now.
But it could happen later in the year.
Speaker Change: In fact, so far, the last quarter, as you can see, we've had
Speaker Change: More success than what we even thought in terms of bringing down the cost of interest paying deposits. So the reality on the ground is the deposit competition is not as
concerning as the lending side is.
The Spreadtide thing that I was talking about is really...
Speaker Change: Where the competition is is kind of revealing itself. We're seeing much tighter spreads
We're seeing banks going back to doing non-relationship business.
Speaker Change: You know, a year ago, nobody was doing non-relationship business. If you didn't have deposits, you know, you couldn't get a loan.
Now, that's not the case. It's back to, you know...
Speaker Change: are behaving. We're still trying to hold the line on that.
Speaker Change: I would also add to that, you know, your overall question, Liddy, that, you know, we're projecting deposits up mid-single digits and total loans up low-single digits. Some of the funding of new loan production is still going to continue to come from the runoff of the resi and non-core commercial portfolios, as well as from deposit growth.
Speaker Change: Right, yeah, that's great color. And then just last for me looking sort of at the asset base expectations.
Speaker Change: You know, you've done a great job paying down a bunch of wholesale funding. Do you think there's more to go, which sort of keeps the asset base flat over the year ahead? Or do you think we could begin to see the base grow from here?
Speaker Change: I think wholesale borrowings, while we, you know, we paid down a lot, I don't think we can pay down that much going forward. There'll be some, some little bit of trimming of that, but not a lot.
Speaker Change: So overall, the balance sheet will probably be up a little bit, rather than being down or flat, as was the case last year, but not by a meaningful amount. It's not like we're predicting, you know, high single digits growth, it'll be up a little bit. So it'll be
Speaker Change: You know FHLB pay down story is coming to an end.
All right. Thanks for taking my questions.
Speaker Change: Thank you and one moment as we move on to our next question.
Speaker Change: Our next question is going to come from the line of Ben Gerlinger with Citi. Your line is open. Please go ahead.
Hey, good morning.
Speaker Change: So, I know you guys have made a lot of initiatives in the past couple of years for non-interest bearing.
Tom Cornish: deposit. Leslie, here's your soapbox to stand on. The title is a big component and it's grown, there's a seasonality to it. Is there any other ones that you wanted to highlight? And when you think just bigger picture, if I recall correctly, 35% was kind of the longer term.
Speaker Change: goal mix. How do you how do you guys see that over the next couple quarters here? I know that you have the tail ends, but just kind of what's the momentum looking like over the next 180 days?
Speaker Change: Well, you know, we're at 27% right now, DDA to total deposits. I will be very happy if we get to 30% this year, which is a lot of growth, but we're shooting for that.
Speaker Change: When do we get to the mid 30s? It's a little more sort of medium term, long term answer. And I can't pinpoint beyond this year, but this year we're pushing to get to 30% and hopefully a little bit above that.
Speaker Change: Okay, that's helpful. And then just to just kind of clean up questions, Leslie.
Speaker Change: I know you said margin could be down, or I think you said down four basis points.
Speaker Change: and one cue. Are you just highlighting the span? Yeah, let me clarify that. Yeah, let me clarify that. I didn't say margin would be down for basis points in one cue. I said that margin expansion would be...
Speaker Change: would take place over the course of 2025 would be more challenged in one queue because there will be three to four basis points of pressure from the roll off of hedges, but, you know, that doesn't translate to margin being down three to four basis points.
And again,
Speaker Change: I'm probably a whole lot less focused than you are on what happens in the first, unfortunately for you, but what happens in the first quarter versus the second quarter versus the third quarter, I'm really much more focused on the trend over the year, which should be expansion.
Speaker Change: Gotcha. Yeah, make sure I thought it was just like you said, it's a higher hurdle for one cubit.
Yes, correct. That's correct.
Speaker Change: Yes, and then you said expenses and you're not going to try to pinpoint rail car, but is that mid-single inclusive? Yeah, expenses as reported including the rail car costs of mid-single digits on a gap basis year-over-year is what I've died
Appreciate the call. Thank you.
Speaker Change: Thank you. And one moment as we move on to our next question.
Speaker Change: Our next question is going to come from the line at Timber Blazer with Wells Fargo. Your line is open. Please go ahead.
Transcription by ESO. Translation by —
Hi, good morning.
Speaker Change: Raj, last quarter, you had laid out, you know, ROA over 1%, return on equity, kind of 10 to 12%. NIB, we just talked about over 30% into taking a better part of next year to get there. I'm just wondering, with the 4Q result, does the magnitude of those profitability ratios or the timing change? Or are you still thinking that it's going to take much of 25 to get you over those hurdles?
Speaker Change: Our guidance, you know, we provide one-year guidance. We don't try to go beyond that because it becomes very dicey to look past 12 months.
Speaker Change: I would say that we're marching in that direction. It's very hard to say exactly when we get there. But I'm happy to see this progress we've made last quarter, which, like I've said a couple of times already, was
You surprised even us, 78 basis points ROA.
Elchin Arora
Speaker Change: Pretty damn close to 10%, but you know, we certainly don't want to stop at 10%. We want to get higher. This business model should get you past 1%, like I said in the past, and past, you know, low double digits, you know, 12-13% ROE, but exactly when we get there, it's a little hard to say.
Speaker Change: Got it. And then, you know, appreciate all the color on the DDA.
Speaker Change: transition or momentum there. But just maybe looking at 4Q specifically, is there a way to quantify what the typical or what the seasonality was in fourth quarter that was backfilled by new production? Can you kind of frame the success you had in 4Q which is typically a seasonally soft quarter? Yeah, no, we're not gonna try to get that specific. Yeah, I mean, we have talked about the title is down and it was down, exactly as we predicted.
Speaker Change: Title becomes a very sort of predictable business because now we've done it for so long. So we can, you know, very accurately look at the ups and downs.
Speaker Change: I'm happy with everybody else who pitched in and helped fill that gap. We really don't disclose results at that granular of a level by business line. Got it.
Speaker Change: Got it. And then just last for me, you know, Leslie, you had mentioned on the loan side that the seasonality is kind of opposite of deposits or slower at the beginning of the year, stronger at the end of the year. I guess I'm a little surprised on the CNI side and 4Q with those.
Thank you
It's very, very difficult to predict.
Speaker Change: You know hard to predict that was a big piece of it and you know Raj mentioned the competitive market we are seeing more competition Across the board virtually in every line of business from debt funds. I mean there's trillions of dollars of debt funds
Speaker Change: that are out there and they are, you know, increasingly playing a role.
in Formula-Based Lending and Non-Traditional Lending.
Speaker Change: So that's that's also kind of hard to predict because it tends to be episodic around.
Acquisition Financing or something like that where there's a
Speaker Change: more competitive structure on the table at near bank-like financing rates.
Speaker Change: We, again, we focus predominantly, you know, those things will come and go, they're hard to predict and some quarters there's more and some quarters there's less, but as long as our overall new production is at the levels that we want it to be, and the pipeline looks very good, you know, we know over a period of time that will even out.
Great, thanks for the question.
Speaker Change: Thank you and one moment as we move on to our next question.
Speaker Change: Our next question is going to come from the line of David Bishop with Hovde Group. Your line is open. Please go ahead.
David Bishop: Yeah, good morning, Ron, Leslie, and folks. Curious, Leslie, maybe a question for you. The increase in the unrealized loss on the securities portfolio, is that purely rate-driven? Anything credit-related on some of those segments?
Leslie Lunak: No, nothing credit related. It's it's spreads really more than anything.
Leslie Lunak: It's a rate mark and driven to some extent by spreads, but it's a rate mark, not a credit mark.
Got it, and then did see the.
Leslie Lunak: The decline in loan yields, you know, to the floating rate nature of the portfolio, you know, given if the Fed is, you know, pausing here or sort of, you know, dialing back it, just curious maybe where you see the trend in loan yields over the near term.
Leslie Lunak: I mean, if the Fed doesn't cut again, they should stabilize.
Leslie Lunak: Actually, they should go up because new business is coming on at a higher rate than things that are maturing and paying off. So if the Fed doesn't move again, we should actually see them influx.
Leslie Lunak: Any sense of what new production is coming on these days?
Leslie Lunak: So, yeah, I have those numbers somewhere. Hang on, give me a minute.
Unknown Speaker 05.
Speaker Change: I would say, you know, in the fourth quarter, commercial production averaged a little over seven and a half. So between, you know, a little over seven and a half for the fourth quarter.
Unknown Speaker 0
Speaker Change: Great, and then finally, maybe a holistic question, Raj, you noted the
Speaker Change: The change in administration, who knows how the tariff situation will play out.
Speaker Change: Any way to rank that so you'd be quantified maybe you know segments or you know loan portfolios that are
Speaker Change: Any impact that could feel the impact of tariffs on the commercial side.
Speaker Change: No, not too soon and very hard because it's not just the obvious direct impact. It can be second and third order impacts, which are very, very difficult to predict.
Just way too soon, I think.
Unknown Speaker 0
Got it. Appreciate the color.
Speaker Change: And our next question is going to come from the line of Steven Scouten with Piper Sandler. Your line is open. Please go ahead.
Steven Scouten: Yeah thanks, good morning guys. I just wanted to follow back around Leslie on your commentary kind of around the mid to high single-digit NII expansion potential for the year.
Steven Scouten: Sounds like the balance sheet will be relatively flat and then I think you said maybe the NIM could could peak above.
Steven Scouten: 3% in the back half of the year. So is it fair to convey from that math that most of the upside is coming from that NIM expansion, not especially loan growth or balance sheet growth?
Steven Scouten: Yeah, I think that's probably fair. You know, and, and, and mixed transformation, which is what the margin is reflecting. Yes, I think that's fair.
Speaker Change: Got it. Perfect. Just wanted to clarify. Thank you. And then around the non-inspiring deposit growth, maybe particularly around title on the year.
Can you remind us what
Speaker Change: You know, kind of expense component might be related to that, whether it's ECR or otherwise, that kind of gives the full picture of what's going on with that, those inflows.
Speaker Change: We haven't disclosed that business line results at that specific of a level and we're probably not going to do that.
Speaker Change: Okay. Fair enough. And then maybe just last thing for me, and apologies if I missed it at all, but the one office loan that you guys called out, I think you said it was $26.2 million maybe, or at least that was the...
The one is 25.
Speaker Change: 25. Okay. Is there any additional color you can give there on the specific LTVs of that or any specific reserves that might already be allocated on that loan?
Speaker Change: Other than to say we feel like we're adequately reserved. We try not to get into too many details about one specific credit. You're kind of walking a fine line there.
Speaker Change: Well, we are, we have a specific reserve on it. Yeah.
Speaker Change: Okay, and market by chance? Is that something that can be commented on? It's in the north, but it's not New York City.
Speaker Change: Gotcha, gotcha. Okay, great. Well, thanks for all the color. Appreciate the time today.
Speaker Change: Thank you. One moment as we move on to our next question.
Speaker Change: Our next question is going to come from the line of Jon Arstrom with RBC Capital Markets. Your line is open, please go ahead. Thanks, good morning.
Thank you. Thank you. Thank you.
Speaker Change: Leslie, question for you. When would you like to get to that?
1% area.
Speaker Change: on the reserve level. Do you have a timeline for that? Oh, on the reserve. I thought you were going to say on ROA. I was going to say tomorrow, you asked me when I'd like to get there. You know, it's not so much when I'd like to get there on the reserve, John, it's when I think we're likely to get there. And, you know, I would say we're likely to get there by the end of 2025. But that's predicated on our projected
Portfolio Remix
Speaker Change: So if we have more commercial loan production than we're projecting, we'll get there faster. If we have less, we'll get there a little slower. And it's also dependent on what the economists and movies say about the world. Yeah, that's assuming the economy remains stable and supportive. Obviously, if that doesn't happen, all bets are off about that.
Okay, makes sense. And then, and then Tom.
Maybe for you, kind of a harder question, but...
Speaker Change: What should we expect on losses? Would you consider this quarter kind of an aberration, or should we expect kind of a consistent flow of losses? I know you've said you're reserved for a lot of this, but...
Do you have any thoughts on that?
Speaker Change: Let me take that one and Tom can fill in. For the year, our charge-offs came at, what was it, 16 basis points. Net charge of 16 basis points for a commercial bank is a pretty decent level. In fact, I would say they are probably a little too low on a sustainable basis.
The issue with commercial banks, unlike consumer banks, is that...
Our losses.
Speaker Change: If you look at our losses in any one quarter, this is probably my comment I was making about don't take any one thing in any one quarter and annualize it.
Speaker Change: This is probably the most true when it comes to charge-offs.
Speaker Change: because you could have a quarter at two basis points and then you can have another one at 25 basis points and go back to four basis points. It's all over the place because only one or two loans.
can swing that number a lot.
Speaker Change: So, I think it's really important to look at a 12-month railing or something like that to truly get a full picture. I know the losses we took this quarter, it's not a lot of loans. It's basically three loans.
Speaker Change: And next quarter, it could be zero, it could be one, it could be two, you know, you will have some losses, but measuring any one quarter and, and, and, and extrapolating from that can be can be
Speaker Change: dangerous. So I'd say look at four quarters trailing at any given time, especially for that ratio. But for most ratios, I think you should do that and not focus in on any one particular quarter. Losses in a commercial portfolio are very idiosyncratic.
Bill.
Bill: Yeah, I know it's not an easy question, but that framework helps.
Speaker Change: Question for you, do you have any regulatory changes wish list?
Speaker Change: I will actually probably stand out from my peers in saying that I really had no complaints to begin with.
I think regulators, you know,
Speaker Change: For the most part, you know, I really have nothing to complain about for the last several years Even through the crisis when you know, you get most concerned that after a crisis
Speaker Change: You may end up paying for sins of another bank. We didn't see that. We saw a pretty
You know
Speaker Change: If there's any complaint that I would have, it's something that we don't do much of, it's on the M&A side. We're watching a lot of M&A transactions get held up for a long time, which I know is...
Speaker Change: is not good for the system, it's not good for the communities these banks serve.
Speaker Change: So I think we'll see more M&A going forward. Again, it doesn't impact us directly, but it impacts us indirectly. More M&A means...
Speaker Change: Not that we will participate in this, but it'll create a lot of disruption, it'll create opportunity for us to pick up organically some business. So indirectly, it'll be a good thing for us. But other than that, you know, I really can't say, you know, that, you know, this is some kind of a big
Speaker Change: You know Moment to celebrate on the regulatory front. There's nothing really happening from our perspective on the regulatory front for the last few years It's been fine
Okay, fair enough. Thank you.
Thank you and one moment.
Speaker Change: Our last question is going to come from the line of Jared Shaw with Barclays. Your line is open. Please go ahead.
Leslie Townsend, I'm for Jared.
Just real quick, on the
Speaker Change: Loan Remixing, Loan Composition Remixing. How big is the non-core commercial portfolio in terms of dollars?
Speaker Change: Well, I mean, you can see that there's a table in the press release that breaks that out pretty clearly.
Speaker Change: So, on page 2 of the press release, $200 million in franchise and equipment finance, $720 million in municipal finance.
Unknown Speaker 05.
Speaker Change: And then, I mean, mortgage warehouses right now at 585. We won't call that core or non-core, but we're not trying to run that down. That should grow, not run down. So, but those numbers are all laid out in detail on the second page of the press release.
Speaker Change: Okay, great. And then, just on capital levels, CZ1 is getting up there. I guess, any priorities on use of capital going forward? I think Prime Minister talked about a little bit last quarter as a possibility. Just what's a good capital level for you guys and how would you manage that?
Speaker Change: From a capital perspective, I'd say, what would we say, our settlement ratio is now about 12%. We benchmark ourselves to our peer groups, I think we're kind of smack in the middle. It's not like there's, you know, we're on, you know, far end of that curve in terms of excess capital.
Speaker Change: You could argue for a small buyback, but it's not going to be a very big one I don't think it'll move the needle much at all We will you know, we will continue to talk about it at every board meeting The next board meeting is that in February, but I I don't think there'll be much movement over there
Speaker Change: And you know some of the uncertainty I talked about is you know still very much going to be on our mind to see how All the stuff that will change it will impact
Speaker Change: The Bank. So I think we'll stay put for the time being. There is a
A cadence that we've had with dividend increases.
Speaker Change: So that will also be looked at in February. I don't want to speak before that meeting happens, but you know, you can look at the cadence over the last couple of years.
Speaker Change: and predict from that what we will do. But other than that, not really much happening on the capital front. Agreed.
Okay, thanks. That's clear.
Speaker Change: By the way, I just want to go back to one question, the previous question about regulatory, you know, question about, you know, what, what positive, I think the one positive that I do see is there's a lot of stuff that was proposed.
Speaker Change: You know, on CRA, on broker deposits, you know, some climate rules and SEC stuff, the fact that, you know, that was taking a lot of mind space for us, right, getting ready for all those things and what impact it will have and how do we need to tweak our business or not tweak it.
Speaker Change: That uncertainty goes away and creates room for us to actually work on other stuff.
Speaker Change: So that is definitely a positive. I've seen an email from somebody yesterday that these are all the lists of things that the FDIC is talking about not doing. Not about doing, but not doing. And that certainly is a big positive.
Speaker Change: for stuff that could have been in the pipeline and would have taken a lot of time and effort from us if it had come to fruition. So that I'm certainly, we're happy about.
Speaker Change: that would also add a more business oriented regulatory environment for all of our clients. It's beneficial to us. It's beneficial to the entire industry.
Speaker Change: Thank you, and I would now like to hand the conference back to Raj Singh for any closing remarks.
Raj Singh: Now, thank you very much for joining us. Like I said, you know, this is a strong finish to a strong year. And hopefully, this trend will continue to deliver on this. A year from now, we can come back to you with a similar story. And but thank you for taking interest in listening to us. And if you have any detailed questions, you know how to reach Leslie or myself. Thank you. Bye.