Q4 2024 Webster Financial Corp Earnings Call
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Speaker Change: Good morning, welcome to the Webster Financial Corp, fourth quarter 2024 earnings Conference call. Please note. This event is being recorded I would now like to introduce Webster's director of Investor Relations Emlen Harmon to introduce the call. Mr. Herman. Please go ahead.
Speaker Change: Good morning, before we begin our remarks I want to remind you that the comments made by management may include forward looking statements within the meaning of the private Securities Litigation Reform Act 1995 and.
Speaker Change: And are subject to the Safe Harbor rules. Please review the forward looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us presentation.
Speaker Change: The presentation accompanying management's remarks can be found on the company's investor Relations site at investors <unk> Webster Bank Dot com.
Speaker Change: Q&A portion of the call we ask that each participant ask just one question and one follow up before returning to the queue I'll now turn the call over to Webster financials CEO John CLO.
John CLO: Good morning, and welcome to Webster financial corporations fourth quarter 2024 earnings call. We appreciate you joining us. This morning, I will provide some high level remarks on our performance after which our CFO Neil Holland will cover the financials in more detail, our president and Chief operating Officer Luis Messy Ani is also joining us for the Q&A portion.
Speaker Change: The call today.
Speaker Change: The company again realized a number of strategic achievements in 2024, as we continued to deliver for our clients and position the bank for the future.
Speaker Change: A number of steps to improve our balance sheet, including optimizing asset risk weightings for regulatory capital ratios, reducing our concentration of commercial real estate assets and improving the yield profile on our securities portfolio.
In addition to deposit growth, we continued to add off balance sheet funding capacity further enhancing our liquidity profile.
Speaker Change: The acquisition of <unk> early in the year added a new source of low cost long duration deposits with a fantastic growth opportunity.
Speaker Change: Through our integration work in 2024, we have developed an even greater appreciation for the growth potential of the business, we're introducing banking products to meet trusted client base, increasing industry adoption of settlement administration.
Speaker Change: Flooring alternative markets for our <unk> products and services.
Speaker Change: These strategic accomplishments establish a solid foundation for Webster's future, particularly as we grow toward a heightened regulatory paradigm and prepare to operate in a higher for longer interest rate environment.
Speaker Change: From a financial perspective, we grew both loans and deposits amidst a challenging year for the banking industry on both fronts.
Speaker Change: Loan growth was driven by our C&I and residential mortgage setting Webster up for balanced loan growth into the future.
Speaker Change: Our full year financial results continue to be among the best of our lifestyle peers, including an adjusted return on tangible common equity of 17, 5% adjusted return on assets of one 3% and efficiency ratio of 45, 4%.
Speaker Change: Turning to slide three we ended the fourth quarter on a solid trajectory with an adjusted return on tangible common equity of 17, 7% adjusted return on assets of one 7% and an efficiency ratio of just below 45%.
Speaker Change: Loans and deposits continued to grow our net interest margin expanded and we had some unique noninterest income opportunities in the quarter.
Speaker Change: On slide four we continue to be very proud of the differentiated funding profile. We have built at Webster and are continued to be a focus for us in 2024 on a year over year basis, we grew deposits in each of our differentiated business lines, our loan to deposit ratio of just over 80% provides us with another element of flexibility.
Speaker Change: As we move into 2025 and beyond.
Speaker Change: As previously noted we added a <unk>, which has grown its deposit balances to just over $1 billion from $800 million at the time of acquisition. We continue to be excited about the potential of this rapidly expanding business.
Speaker Change: HSA Bank grew its deposits by $800 million in the year in part attributed to the launch of the HSA and best platform, which helps ensure seamless access between an HSA account holder and their investments.
Speaker Change: We've seen an accelerating deposit growth in consumer through our digital channels as we've enhanced digital account opening capabilities in our branch network and private client segment in the.
Speaker Change: The commercial banking deposit growth benefited from the expansion of our 10 31 exchange business and emphasis of bilateral relationships with our commercial real estate and middle market clients.
Speaker Change: We continue to grow our client base of interlink, ensuring access to core FDIC insured funding and enhancing deposit availability to our partner depository institutions overall, a lot of good developments on the funding front, which will continue to be a focus of ours as we move forward.
Moving to slide five we continue to provide metrics on the <unk> portfolio with a focus on office exposure to office is down materially again, this quarter to less than $825 million and metrics on the remaining portfolio have improved.
Speaker Change: Office and health care services, we are not seeing any other pockets of correlated weakness.
Speaker Change: On overall credit despite a higher chart level of charge offs in the quarter, we see underlying credit migration trends moderating and still believe we are looking at a mid 2025 inflection point on overall credit metrics in the quarter net charge offs totaled just over $68 million with 60% of those charges coming from traditional office.
Speaker Change: <unk> or health care services credits the two portfolios, we have been talking about over the past year, we still believe a normalized annualized charge off rate is 25% to 30 basis points with some volatility quarter to quarter, given the commercial bias of our portfolio 2024 overall net charge offs approximated 30 base.
Speaker Change: This points the high end of that range with that I'll turn it over to Neil to provide some additional detail on our solid financial performance in the quarter.
Neil Holland: Thanks, John and good morning, everyone I'll start on slide six with our GAAP and adjusted earnings for the quarter on an adjusted basis, We reported net income to common shareholders of $240 million and diluted EPS of $1 43.
Neil Holland: Adjustments consisted of a pretax $57 million securities repositioning charge, and a $29 million deferred tax asset valuation charge.
Neil Holland: Turning to slide six.
Total assets were $79 billion at period at effectively flat to last quarter as growth in loans and securities were offset by lower levels of cash at period end.
Neil Holland: Loan to deposit ratio increased modestly to 81, 1%.
Neil Holland: Capital remained in a strong position as retained earnings largely offset the impact of greater unrealized security losses.
Neil Holland: Loan trends are highlighted on slide eight.
Neil Holland: In total loans were up $558 million or one 1% linked quarter loan growth primarily came in C&I and residential lending categories CRE was down due to a decline in the office portfolio and increased payoff activity at year end.
Sorry concentration levels declined to 255% from current levels, we are well positioned to return to modest growth in the portfolio without increasing concentration, particularly as we have the opportunity to build relationships with the attractive risk reward characteristics.
Neil Holland: The yield on loan portfolio was down 26 basis points.
Neil Holland: Driven by the effect of the 100 basis point, the fed cuts since September on our floating rate loan portfolio.
Neil Holland: We provide additional detail on deposits on slide nine.
Neil Holland: We grew total deposits by $239 million as seasonal declines in public funds were offset by short duration time deposit growth and modest growth in other categories exclusive public fund deposits DDA balances increased by $75 million, marking the second consecutive quarter of growth.
Neil Holland: Moving to slide 10.
Neil Holland: Total revenues were up $35 million over the prior quarter with a $19 million increase in interest income and a $16 million increase in non interest income.
Neil Holland: Net interest income benefited from a modest expansion in NIM and growth in interest, earning asset noninterest income was up $16 million over the prior quarter as we realize the large direct investment gains it's a positive swing in a derivative valuation adjustment.
Neil Holland: Adjusted expenses were up $12 million over the prior quarter and our provision was up $9 million.
Neil Holland: Excluding adjustments our tax rate was 27%.
Neil Holland: Overall, adjusted net income was up $15 million relative to the prior quarter the efficiency ratio came in at 45%.
On slide 11, we highlight net interest income, which increased $19 million or three 2% linked quarter driven by balance sheet growth and a modest increase in our net interest margin. The NIM was up three basis points to 339%.
Neil Holland: In the fourth quarter, we incrementally sold securities with book value of $665 million and reinvest it was approximately 300 basis point improvement in yields and nominal impact to capital ratios.
Neil Holland: Anticipated earn backs on the transaction of three years, we've reduced our total deposit costs by 16 basis points in the quarter.
Neil Holland: Slide 12 illustrates our interest income sensitivity to rates we have.
Neil Holland: Proactively reduced our asset sensitivity by over 95% since 2021 with the intent to provide a stable interest income trajectory through a variety of interest rate environment.
Neil Holland: On slide 13 as noninterest income.
Neil Holland: Adjusted non interest income was $109 million up $16 million over the prior quarter.
Neil Holland: Let me address the investment gain and the positive CVA in the quarter noninterest income would have been roughly $95 million underlying business activity remained consistent to the prior quarter.
Turning to slide 14, we have detail of noninterest expense.
Neil Holland: We reported adjusted expenses of $340 million up from $328 million and three Q.
Neil Holland: In the quarter, we realized higher performance based incentive accruals and a seasonal increase in benefit expense and made a charitable contribution to the Webster Foundation.
Neil Holland: Slide 15 details components of our allowance for credit losses, which was up 2 million relative to the prior quarter.
Neil Holland: Bookings $61 million and net charge offs, we recorded a $63 million provision effectively matching charge offs, our allowance as a percentage of loans remained effectively flat to last quarter at 131 basis points as John indicated charge offs were principally related to traditional office and health care service related credits.
Neil Holland: Slide 16 highlights our key asset quality metrics as you can see on the left hand side of the page risk rate migration slowed in the quarter with nonperforming assets of 8% and commercial classified loans of 17%.
Neil Holland: Turning to slide 17, our capital levels were effectively flat or up modestly as we retain a good amount of excess capital our tangible book value per share declined to 30 to $95 per share from $33, two six reflecting the impact of ASC.
Neil Holland: For full year 2025 outlook appears on page 18.
Neil Holland: We anticipate loans will grow 4% to 5% on an end of period basis with growth driven by a diverse mix of asset classes.
Neil Holland: We also expect deposits will grow 4% to 5% on an end of period basis.
Neil Holland: Anticipate net interest income of $2 45 to $2 5 billion on a non FTE basis for.
Neil Holland: For those modeling net interest income on an FTE basis, I would add roughly $55 million in the outlook.
Neil Holland: Our outlook assumes $2 25 basis point fed funds reductions beginning in March.
Neil Holland: We expect noninterest income will be $370 million to $390 million we.
Neil Holland: We anticipate expenses will be in a range of $1 39 billion to $1 four 1 billion with an efficiency ratio of between 45% and 47%.
Neil Holland: Incorporated in our expense outlook are approximately $15 million to $20 million in incremental run rate operating expenses needed to prepare for our eventual transition to a category four bank.
Neil Holland: We are prioritizing investments that enhance our operating foundation, including data and reporting frontline controls and Treasury management.
Neil Holland: Over the next several years, we will we believe we will add between $40 million to $60 million and run rate operating expenses inclusive of the amount realized in 2025, they will make the bank category already under the existing proposals.
Neil Holland: We continue to anticipate our effective tax rate will be approximately 21% our near term common equity tier one ratio target remains at 11%.
Neil Holland: That I will turn it back to John for closing remarks, Thanks, Neil as Neil just noted we are proactively investing in webster's future investments.
Neil Holland: Since we are making to improve our data and analytics capabilities not only prepare webster for a large bank regulatory regime, but will also allow the bank to operate more nimbly discover new pockets of opportunity in earlier mitigation of risk management concerns.
Speaker Change: In addition to the investments needed to simply become a bigger bank. We are also investing proactively to grow our existing businesses at the outset of my remark I mentioned some of the opportunities we see to expand the matrix is addressable market also contemplated in our outlook our business development investments across our various business segments that will drive the company's performance well.
Speaker Change: Beyond 2025, and the commercial bank, we are enhancing our treasury management capabilities and hiring middle market banking teams in consumer we are enhancing the capabilities of our digital banking channels and client acquisition tools and an HSA, we will continue to improve our user interface and analytics capabilities that improve client engagement.
Speaker Change: Webster remains well positioned for the future given our strong capital position and diverse balance sheet, our efficient operating structure enables us to make investments necessary to grow our business, while maintaining a peer leading return profile.
Speaker Change: For a wrap up I did want to note that we have colleagues and clients who have been impacted the end of last year. The floods in North Carolina and now the fires in Los Angeles, and I wanted to express our sympathies to them and everyone impacted by those strategies. We continue to do all we can to help mitigate some of the damage there.
Speaker Change: Thank you to our colleagues for their hard work and contribution to Webster success in 2024.
Speaker Change: They delivered again fantastic outcomes for our clients and communities. Thank you all for joining the call today, operator, we will open it up for questions.
Thank you we will now begin the question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.
Speaker Change: If you would like to withdraw your question simply press Star one again.
Speaker Change: Your first question comes from the line of Mark Fitzgibbon from Piper Sandler Your line is open.
Mark Fitzgibbon: Guys good morning.
Speaker Change: Hey, Mark.
Speaker Change: John It sounds like the Treasury Secretary nominee has disposed to easing regulations on banks like Webster I guess I.
Speaker Change: I am curious if category the category for threshold is raised is it likely that Webster would again become a buyer of small banks would that sort of move up on your priority list.
Speaker Change: Yes, I mean, Mark I think it.
Speaker Change: It stands right now, we're obviously really excited about our path forward from an organic perspective, and you are right that the category for kind of bright line hurdle at $100 billion really take some of the optionality to be acquisitive out of the equation right now.
Speaker Change: <unk>.
Speaker Change: Our expectation is that it will take some time to really get a good sense of what the what the regulatory paradigm will look like after the administration change, but to the extent M&A is easier more allowable or the restrictions or the additional work that we need to do for category four has lessened over time.
Speaker Change: That would certainly put us in an opportunity to build more franchise inorganically. So I guess the short answer is yes, a change in the regulatory paradigm could accelerate or looking at inorganic growth, but it's not in our 25 plan right now and I think we take a pretty conservative view as to how quick.
Things will change over the course of the next year.
Speaker Change: Okay, Great and then that $53 million increase in C&I Npls you had this quarter I guess I was curious how many credits was that and was it concentrated in any one particular industry.
Speaker Change: It was three or four credits it wasn't there was some.
Speaker Change: Office in there as well as usual what we're seeing from an overall credit perspective, and obviously, we had a slightly higher charge offs. This quarter is kind of non accruals and loss really resulting in the two portfolios I mentioned, we have had negative.
Speaker Change: Negative risk rating migration across the loan portfolio.
Speaker Change: <unk> mitigated and moderated materially in the in the fourth quarter. So it's three or four credits.
Speaker Change: And I would say kind of the same usual suspects in terms of the characteristics of those credits.
Thank you.
Speaker Change: Thank you Mark.
Speaker Change: Your next question comes from the line of Jared Shaw from Barclays. Your line is open.
Jared Shaw: Hey, good morning, good morning.
Speaker Change: Jack.
Speaker Change: Yes, just looking at the at the margin trajectory.
Speaker Change: How should we be thinking about that I guess, maybe with the with the backdrop of that securities repositioning.
Speaker Change: And when that was in the quarter.
Speaker Change: Yes, so we talked about last quarter.
Speaker Change: <unk> 2025 to be in that $3 30 range.
Speaker Change: Positive movements in Q4, and steeper curve, we now believe the NIM for 2025 will be in the range of $3 35 to $3 40, so positive increases and on the repositioning we saw very little impact in Q4, just shy of $2 million.
Speaker Change: About $18 million increase in value to our NII in 2025.
Speaker Change: Okay, Alright, thats great color. Thanks, and then I guess, just circling back on sort of capital from it from a different angle you have that 11% near term target of 10, 5% longer term target what would have to happen for you to feel comfortable I guess with with bringing that even maybe down to 10% or so and would we should we.
Speaker Change: Expect us to be looking at buybacks, maybe a little more.
Speaker Change: Rest of way here.
Yes.
Speaker Change: I think we're pretty disciplined around our normal capital management program I think you're right. We're looking at credit moderating, we're still kind of anticipating our best guess right now I'm always reticent to make predictions on credit and timing, but kind of a mid 25 inflection point on credit we are sitting at a pretty <unk>.
Speaker Change: <unk> CET, one ratio right now and we hope.
Speaker Change: More loan growth I think were in line with most of the people that have reported so far and still anticipating kind of mid single digits loan growth, if we get a bump in.
Speaker Change: <unk> activity and loan demand, we will deploy capital there first we have an opportunity to enhance our healthcare franchise. For example, we do another tuck in acquisition, but absent use of capital for there. We are in a position where we anticipate that we would return capital to shareholders. During the course of 2025.
Speaker Change: Thanks, a lot okay.
Speaker Change: Your next question comes from the line of Matthew Breese from Stephens. Your line is open.
Hey, good morning, everybody.
Neil I was hoping.
Speaker Change: Neil I was hoping within kind of the margin guide for the year, you could just discuss expectations around deposit costs.
Speaker Change: Betas, and maybe some insight as to where deposit.
Speaker Change: Deposit costs sit here in mid January.
Speaker Change: Yes, So Q4, we had deposit costs at two 2%.
Speaker Change: We went into December we had moved down about seven basis points to two 3%.
Speaker Change: In Q1, we expect that to continue to decline and we do expect.
Speaker Change: Strong.
Speaker Change: <unk> in Q1 with what we're seeing right now.
Speaker Change: Will tail off a little bit throughout the year on the margin side as we add some additional debt and we have a few things happened throughout the year, but we do expect a very strong Q1, specifically on deposit repricing. We've had some very positive moves and I think as an organization to have seen some great moves on the <unk>.
Speaker Change: <unk> side, we have a playbook, where we run every quarter or excuse me. After every cut we take action and we moved down multiple consumer portfolios. We have a good CD renewal strategy kind of cycle to date, we have a beta of approximate <unk> 30 basis points on our entire deposit portfolio and we are anticipating.
Speaker Change: <unk> maintaining that at about a 30% level.
Speaker Change: Is what is in our guidance as our terminal beta for this cycle.
Speaker Change: And as I mentioned before we expect to cut so kind of do those two cuts we anticipate 30% beta throughout the cycle. So hopefully that helps address a little bit how we're thinking about our deposit cost pricing.
Speaker Change: Yes very helpful. Thank you and then my second one is more strategic.
Mark Fitzgibbon: John understanding some of the more national businesses, you've grown and expanded into over the years I was hoping you could talk a little bit about Webster from a geography standpoint.
Mark Fitzgibbon: How happy are you with the current footprint and might we see you kind of embark on any sort of geography.
Mark Fitzgibbon: Expansion near immediate medium term, if so where.
Mark Fitzgibbon: Thank you, yes, that's an interesting question I don't think we have any specific plans to sort of take our local businesses outside of our branch footprint Philadelphia.
Boston, which is where we do most of our.
Mark Fitzgibbon: Local commercial real estate middle market business banking that kind of activity I think we found over time, its very difficult to be a new entrant and have good credit quality and grow by parachuting people into new markets. I think what we have done differently than others, who have taken that approach and opening up <unk> and so forth as you.
Mark Fitzgibbon: Mentioned have a good mix of kind of local regional and national businesses, and we're pretty pleased with that so you think about things like we do all of our sponsor business is kind of national public sector finance.
Mark Fitzgibbon: Equipment finance are generally national.
Mark Fitzgibbon: In business, we understand the geographies, we understand the businesses. So I think you'd probably see us continue to expand some of those more regional and national businesses and unless and until the M&A environment was ripe and we had really good opportunities to potentially kind of expand our core branch footprint or our local.
Mark Fitzgibbon: Footprint, I think you'd probably see us.
Just continue to invest in our national businesses as our kind of pipeline for geographic expansion.
Speaker Change: Great I'll step back thanks for taking my questions. Thanks, Matt.
Speaker Change: Your next question comes from the line of tumor <unk> from Wells Fargo. Your line is open.
Speaker Change: Hi, good morning, Thanks for the question Mike.
Speaker Change: My first one I.
Speaker Change: I just wanted to circle back on margin.
Speaker Change: The fourth quarter results or your kind of near the top end of the range that you've already laid out you mentioned that first quarter is going to be pretty strong again.
Speaker Change: Are we implying that the rest of the year theres going to be enough pressure to kind of get it back within the range or could that range proved to be conservative here.
Speaker Change: Yes, I think we're pretty confident with that $3 35 to $3 40 range.
Speaker Change: There is obviously a little bit of variability, but the team here has done a great job of positioning us in a very neutral position and in Q1, we have large inflows of our HSA deposits into the seasonal deposits. So.
Speaker Change: We see a lot of benefit in the.
Speaker Change: Beginning of the year I think our big questions that we had going into the year that kind of gets you to the bottom end of our guide and the top end of our guide is the DDA growth as I mentioned in my prepared remarks, we've returned to growth there and we do expect kind of stable to some level of growth on the DDA side, which will help.
Speaker Change: We also do have a little bit more long term debt coming in in the second half of the year, which puts a little bit of pressure on net interest margin. We're talking a few basis points and then another factor I mentioned last quarter is we also are increasing our cash levels. So very little impact to our net interest income actually has a positive impact slightly positive.
Speaker Change: But it will have a kind of a three to five basis point drag on NIM as we take cash up in the second half of the year also.
Speaker Change: So kind of wrapping that up confident in our 375 to 340 <unk> NIM for the year.
Speaker Change: Okay, Great and then I just wanted to dig in a little bit.
Speaker Change: Credit inflection.
Speaker Change: We should think about.
Speaker Change: Quantifying that does that imply that that 25% to 30 basis points that John you called out as being a normalized level do we is it a step function towards the towards that level kind of off of the current base and I'm just wondering what your thoughts are around that.
Speaker Change: The yield curve.
Speaker Change: Rates stay where they are continue to move higher what kind of tail risks that might introduce to some of your CRE properties.
Speaker Change: Yes, it's a great great question, obviously, a relatively difficult difficult one to answer with respect to credit cost and provisioning, but if you look at the first three quarters of 'twenty. Four we were in that 25 to 30 basis point range in terms of charge offs, that's kind of our base case assumption as we go across 25, hoping obviously that we can outperform that over <unk>.
Speaker Change: And so I think while obviously the provision itself is also reliant on the Moody's forward out outlook of economics, what type of credit quality, we're onboarding and new originations the pace of loan growth and so forth, but if you peg it to kind of charge off level I think our.
Expectation is that we'll be somewhere around the 25 to 30 basis points in each of these next quarters and for the full year and 25 with the caveat that we always say because we have a huge commercial banking portfolio you can get some lumpiness and outperform and underperform in any one given quarter. So I would the way I look at.
Speaker Change: Is that the first three quarters of 'twenty four is more of a proxy for what we expect to happen during the course of 'twenty five so if you were pegging that.
Speaker Change: Our base case models, we're back to the way you. The way you envisioned our performance in the first three quarters underneath that right in terms of risk migration.
Speaker Change: We did see some green shoots in the fourth quarter just in terms of risk ratings. So on the C&I side for example, we moved closer.
Speaker Change: In the direction of more neutral in terms of seeing upgrades and downgrades, we didn't have a big bump in criticized loans and C&I.
Speaker Change: We think we've gotten our arms around portfolios that I mentioned earlier and obviously, we know every credit there and if you look underneath the actual credit metrics in terms of classified and non accruals.
Speaker Change: That office portfolio are actually improved so what we have left we feel better about than we did a year ago in terms of what was remaining so.
Speaker Change: I think there are reasons when we look at our pipeline and I talk to Jason about this all the time obviously.
We still think kind of <unk>.
Speaker Change: Mid 'twenty five is getting sort of a more balanced on upgrades and downgrades in the portfolio, which should have a positive impact on provisioning and if we hit that range of charge offs.
Speaker Change: <unk> provision levels kind of go back to where they were the first three quarters and hopefully lower overtime, if we get better economic data and an acceleration of improvement in the portfolio. The good news for US is we're very profitable even in a even in a high charge off quarter in the fourth quarter, we had.
Speaker Change: Really terrific return profile and good profitability.
Speaker Change: Great.
Speaker Change: Your next question comes from the line of Chris Mcgratty from K B W. Your line is open.
Chris Mcgratty: Okay, great good morning.
Speaker Change: Good morning, Chris.
Chris Mcgratty: Hey, John if you look at the guide the loan growth guide of $4 to five last year I think five to seven in that.
Speaker Change: The macro kind of.
Speaker Change: It works against you what was interesting to me is you saw the sponsored book grow in the quarter.
Speaker Change: That was that was been a variable from last year. So can you just give a comment or two on trends in that portfolio.
Speaker Change: Yes.
Speaker Change: Yes so.
Speaker Change: I am I am snake bitten to go out on a limb on these things Chris So what I will tell you is that the pipeline is stronger.
Speaker Change: We are seeing some more activity more activity for us is interesting because it not only means more origination, but it means more payoffs because there's more activity in the portfolio with sponsors selling their platform companies. When there is an active M&A environment. So.
Speaker Change: If you if you asked me again not to make a prediction I feel better about the momentum we have in that business going into 25 with more economic activity, a better M&A environment and a bigger pipeline.
But.
Speaker Change: You'll see in our overall loan growth numbers.
Speaker Change: I think still a relatively balanced and conservative view and interesting we only have the benefit of a few banks, obviously reporting before us, but it's been interesting to see everybody kind of in this whether it's three to six four to five whatever that ranges and I think its because.
Speaker Change: There is obviously the Trump bump exuberance that came right after the election, but I think when you look through it you talked to your customers you look at pipeline Theres, a decidedly positive bias.
Speaker Change: Optimism going forward, but I think it's cautious and I think if people feel like it will take time to see how all of these dynamics play out what happens with tariffs what happens with rates.
Speaker Change: Before people really start investing aggressively and so that's why I think we still think the best guess is kind of that mid single digits with a growth perspective, but I am more encouraged by what we're seeing as we head into 'twenty five and the sponsor book than I was a year ago.
Speaker Change: Okay great.
Speaker Change: I appreciate that and then in terms of just I missed it I just jumped on late.
Speaker Change: The capital commentary.
Speaker Change: Let me go into 10 and a half.
Speaker Change: And again forgive me because you remind me kind of.
Speaker Change: The buyback stock.
Speaker Change: Stack rank in terms of priorities and then I guess, what it would what it would take to get to 10, five what would you need to see.
Speaker Change: Yes, yes, and we just talked about this so I think you're you are right. We are in a very strong capital position right, we're well in excess of our short term target of 11%.
Speaker Change: I think that we are more more likely.
Speaker Change: Then not to be in a position to return capital to shareholders. During the during 'twenty five the elements in that or if loan growth does surprise us to the upside obviously, that's a priority we have opportunity to continue to enhance our funding profile through tuck in acquisitions around the metro Sir HSA that would be.
Speaker Change: Our priority use of capital for us.
Speaker Change: As we see credit continue to moderate we'll be more confident and depending on market conditions, if we do not see.
Speaker Change: Loan growth outside of what our current view is on loan growth then we would be likely to engage in share purchases.
Speaker Change: Materially during the course of 2025.
Speaker Change: Given your cap rates that you can do you can do both right.
Speaker Change: Yes, we can yes, we can and I would say to your last question. We've actually internally spent a lot of time on this with respect to.
Speaker Change: Trying to peg, a time or an inflection point, where we move to 10, 5% and I think if we do see credit moderate and we see a more normalized operating environment and we get a better sense of what the regulatory landscape looks like for us at 25 progresses, we will be then comfortable too.
Speaker Change: Move that capital target ratio down to our long term 10, 5% target.
Speaker Change: Great. Thanks starts with a repetitive question no not at all.
Speaker Change: Your next question comes from the line of Laurie Hunsicker from Seaport. Your line is open.
Laurie Hunsicker: Yeah, Hi, Thanks, Good morning, Laurie I wondered if.
Laurie Hunsicker: If we can just go back to charge offs can you can you share with us on the charge off amount.
Speaker Change: The $61 million or so of commercial net charge offs, how much of that was office.
Laurie Hunsicker: First is how much of that.
Speaker Change: It was actually in the health care services.
Speaker Change: And then also just a little bit of comments in terms of you had a pretty sharp drop in office linked quarter, which was great $917 million down to $824 million.
Speaker Change: How much of that obviously with charge offs Taylor or what exactly is happening.
Speaker Change: Sure. So I would say that it's a relative office office related charge offs were around $15 million.
Speaker Change: And.
The healthcare charges were around $20 million to.
Speaker Change: To give you a sense in that $60 million of the $60 million in charge offs. The others were smaller contributions one offs.
Speaker Change: Fraud different things that were management and kind of idiosyncratic if you will.
Speaker Change: Your question on office, we did not have any.
Speaker Change: Charges related to loan sales.
In the quarter, so that was sort of natural reduction I gave you the charge off numbers. So the rest of it is good it's payoffs and paydowns over time, and we definitely saw more activity, which I think portends too.
Speaker Change: Support some of our discussions around moderating credit migration and activity.
We are seeing we saw a good amount of commercial real estate and C&I payoffs payoffs in the quarter and so that was there were more natural remediation. If you will a natural reduction in the portfolio.
Speaker Change: This quarter, which was good.
Speaker Change: Great Great. Thanks, and then just going back to margin for a moment do you have the spot margin for December and then can you just remind us when exactly in the quarter was the security infrastructure.
Speaker Change: Sure.
Speaker Change: Yeah. The spot margin for December was very strong as I mentioned earlier, and we were actually at 345% for December.
Speaker Change: The securities repositioning that happened kind of middle of the quarter, where we saw $1 $8 million of positive benefit in the quarter due to the securities repositioning.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Anthony <unk> from Jpmorgan. Your line is open.
Speaker Change: Hi, Good morning, your NII guidance assumes two cuts beginning in March, but if we don't get caught up until the second half of this year could you talk about the impact to the NII Guide range you provided.
Speaker Change: Yes.
Speaker Change: So we've done a lot of work around that and as I mentioned earlier on the call we're positioned fairly neutral for our interest rate sensitivity and if we let's just say we don't get two cuts at all during the year.
Speaker Change: Kind of in a plus or minus $10 million range. So it all fits within our guidance and isn't a material drive I mean, those are material numbers, but not a material driver in our outside of our range were a little bit more sensitive to longer term rates, where we can see a little bit more benefit.
Speaker Change: Long term yields picked up but still positioned fairly neutral there.
Speaker Change: Thank you and then my follow up on your loan growth guide of 4% to 5% is that back half weighted or do you expect continued growth in the first half and I know you mentioned diversified sources of loan growth, but can you just talk about specific areas of portfolios do you expect to drive loan growth. This year. Thank you.
Speaker Change: Sure I would say number one it's more seasonal than kind of backend into the fourth quarter is generally slower for us and so I would think that off of that you'd see growth for the remainder of the year.
Speaker Change: When you look at our portfolio, we're assuming growth across categories.
Speaker Change: Obviously, we've spent a lot of time, we are two quarters ahead in our commercial real estate concentration reduction we're now at that $2 50 target we have seeing more payoffs. There. So we are in the commercial real estate business and we have capacity to replace what's rolling off and.
Speaker Change: Even quarter to quarter potentially have some growth in commercial real estate, but that should grow more slowly than our C&I categories otherwise it's across sponsor it's across our national businesses, it's across regional middle market business banking and mortgage as well on the consumer side.
Speaker Change: Thank you.
Speaker Change: Thank you Andrew.
Speaker Change: Your next question comes from the line of Nick <unk> from UBS. Your line is open.
Nick <unk>: Hi, Thanks for taking my question.
Speaker Change: Maybe just to start good morning, maybe just to start coming back to the expense outlook and thinking about the investment spend related to the regulatory front.
Speaker Change: Clear that they were going to be a more meaningful changes in the regulatory backdrop, how would that change how you're thinking about the $40 million to $60 million incremental run rate expenses.
Speaker Change: Yes.
Neil Holland: Great question, and I think what I'd say and then I'll turn it over to Neil to actually answer the hard the hard part of the question.
Neil Holland: One of the things we're doing as we build out our roadmap here is we are taking into consideration. The fact that there may be changes.
Neil Holland: Elimination of some requirements and so what we're doing is all the investments we're making in 'twenty five.
Neil Holland: Clearly important investments for us to make and you would want us to make as an analyst or as an investor to continue to build out the resiliency and the strength of the infrastructure of the bank both on a risk side on a technology side on the data side and what we're back ending in our prioritization and are Gantt chart or those that may not be required.
Neil Holland: Or could change.
Neil Holland: With respect to the dynamics or the extent to which we need to invest so.
Neil Holland: I think for us.
Neil Holland: Many of these investments that are there, we're making regardless of what the category before requirements are and then we're trying to back end and kind of de prioritize in our three year journey those investments that we may be able to pull back because they are either more check the box are perfunctory or we don't think they add significant value to the strengthened strength of.
Neil Holland: Our franchise. So I don't know, whether you will be able to give you kind of dollars. There. It is very difficult like things like T. Lack our obvious right. If you don't have to issue <unk>.
Neil Holland: That's a savings, but the other stuff is sort of nuanced.
Speaker Change: I don't know whether we'd be prepared to tell you what savings we would have based on what regulatory changes are there. Yes, I don't think we had specific dollars tied to different rules or potential changes and I don't think I could have said any better than what John said, So I don't have much else to add.
Speaker Change: Perfect. Thank you and then maybe coming back to another strategy related question.
Speaker Change: Last year, you had the announced JV with marathon to get involved in the direct lending arena is that partnership now up and running and is there any potential that it could be incremental to how you're thinking about growth in 2025. Thank you.
Speaker Change: Right Great. Great question, we anticipate the partnership to be alive and active into Q. That's our best guests were still bullish I will tell you that there is.
Speaker Change: No economic.
Speaker Change: Sure.
Speaker Change: Advantaged or value added into our current guidance, we want to be able to once we're up and running get a good insight as to what that will mean for loan growth loan balances and investment income to us, which will obviously be delayed from the opening but.
Speaker Change: We are still excited about it.
Speaker Change: But it doesn't drive any meaningful economics in our guidance so its potential upside.
Speaker Change: Perfect. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Bernard <unk> from Deutsche Bank. Your line is open.
Speaker Change: Hey, guys good morning.
Speaker Change: Just on expenses.
Speaker Change: The color on the $15 million to $20 million of large bank costs incorporate in the 25 guide, but could you just provide any additional color on the contributions of expense growth. John you noted the focus on the initiatives growing our metros, maybe how much growth is really there or what other incremental investments, you're making and just any color you can provide on the contributions.
Speaker Change: Yes.
Rick.
Speaker Change: Some comments there. So we have I would say around $30 million year over year really supporting the business lines with some good healthy investments in areas such as the <unk> that we have strong growth expectations, we talked about our category for.
Speaker Change: We're also investing continuing to invest in our technology infrastructure and you also have some things like annual merit and benefit and payroll taxes and some of those types of expenses, but I would say that the three biggest areas of focus investment would be on our preparation for category for continuing to support our business lines.
Speaker Change: And our client experience and then really continuing to invest in our technology and infrastructure to prepare for future growth.
Speaker Change: Okay, Great and then just on deposits I know there was some contributions from the 10 31 exchange relationships you've noted.
Speaker Change: Was that more seasonal like more <unk>.
Speaker Change: What are expectations for growing that maybe in 'twenty five and just some commentary on the digital channels.
Speaker Change: Here, we're leaning in there just any thoughts on growth.
Speaker Change: How the cost of those deposits on that platform kind of play out.
Speaker Change: Yes on the 10 31 side that was it was back ended in 2024 and activity there is going to be driven by whatever happens broadly in commercial real estate activity. So if we get back to a place.
Speaker Change: Where theres more buys and sells and more transaction activity, you're going to see naturally some module, we have good relationships, there and youre going to start seeing.
Speaker Change: Property is exchanging and so forth. So 10 31 business should be should grow in 2025 relative to where it was today on the digital channel side.
Speaker Change: Had good solid growth this year and I really say that across the board we've set aside consumer and commercial and you just look at what we did on the digital on the healthcare and broadly on the healthcare side, we anticipate that 25% is going to be in line or better than what we did in 2024, and we've made a fair amount of investments across the board in all of those business lines to ensure that we stay competitive the product offer.
Speaker Change: <unk> is good.
Speaker Change: Pricing and service proposition is working really well and we're pretty excited about what we can do on those diversified deposit verticals across each and every one of them.
Speaker Change: Okay, great. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Ben <unk> from Citigroup. Your line is open.
Ben: Hey, good morning.
Speaker Change: Hey, guys good morning.
Speaker Change: On the wall of worry for you guys.
Speaker Change: Seems like the guidance here is pretty reasonable for sure a better upside of revenue.
Speaker Change: I know you gave the guidance of 15 to 20 for incremental <unk>.
Speaker Change: Operations and good cash for us.
Speaker Change: The rules don't change I E.
Speaker Change: Steve.
Speaker Change: Is it fair to kind of think that's like 17, and a half incremental 26 and 27 as well on the three year outlook or is it kind of front loaded and you kind of give us.
Speaker Change: So I guess assuming rules are changed.
Speaker Change: Yeah.
Speaker Change: You were breaking up a little bit, but I think I got your question.
Speaker Change: So our assumption of the 40% to $60 million is based on rules as they stand today, we are looking.
Speaker Change: About 15% to $20 million in 2008 2025, as you play that out obviously will analyze things again at the end of next year and as we go through but.
Speaker Change: I see it more as a stair step build then.
Speaker Change: Big fluctuations in either direction. So I think you could.
Speaker Change: Count on our current plan of being more in line stairstep versus having any unusual fluctuations and hopefully I answered your question correctly, there based on what I heard.
Speaker Change: Yes, sorry about that.
Speaker Change: I gotcha.
Speaker Change: The point I don't know, if one year could be a little bit less than the other but that makes a lot of sense.
Speaker Change: And then with that do you think there's any synergies or is that kind of 40 to 60.
Speaker Change: Net number like if you can spend $10 million of investments you could save 5 million somewhere else youre counting that 10 or is it would it be the net number that we attributed this 40 60 is that all of the above.
Speaker Change: Yes, I would say, it's a net number and yes I.
Speaker Change: I think about synergies also.
Speaker Change: There is some John mentioned you could put these.
Speaker Change: <unk> in different buckets.
Speaker Change: Of them may be a check the box needed for our regulatory compliance item, but we do believe as John mentioned many of these expenditures will make us a more efficient and effective organization.
Speaker Change: We go deeper on some capital areas will have opportunities to optimize our capital stack as we continue to invest in the liquidity side, we will be able to optimize and even increased our liquidity levels from today as we invest in the technology infrastructure data, we should get more operating efficiencies going forward. So I do look at the.
Speaker Change: <unk> expense.
Speaker Change: Expenses that will make us a better bank and perform better in the long run and also meet the requirements that are needed to become a category four bank.
Speaker Change: Okay. That's helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Daniel Tamayo from Raymond James Your line is open.
Speaker Change: Thanks, Good morning, guys.
Speaker Change: Thank you.
Speaker Change: Most of my questions have been have been asked and answered but maybe.
Speaker Change: Just a couple of specific ones first you talked about the 30% deposit beta assumption for the rate cut cycle.
Speaker Change: And I think you've talked about kind of.
Speaker Change: What youre thinking in terms of maybe the noninterest bearing not getting back to where it was pre cycle.
Speaker Change: Correct me, if I'm wrong on that but.
Speaker Change: Just curious on kind of what's underlying that assumption given the beta was higher about 40% on the way up.
Speaker Change: Maybe what could improve that that projection from from the 30%.
Speaker Change: Yes, very very fair question, we were above 40% on the way up.
Speaker Change: I mentioned, our guidance is 30% in 2025 on the way down we look at a 4% neutral environment very differently than a zero percent environment that we came out of and I think the big question Mark We have out there is exactly what you hit it where do DDA balances.
Speaker Change: As I mentioned, our guide as modest growth in DDA balances compared to the decline that we had last year.
Speaker Change: If that accelerates I believe we can beat that deposit that data, but I think we have a reasonable assumption at a reasonable data and for our baseline.
Speaker Change: <unk> here.
Speaker Change: Okay.
Speaker Change: Okay I appreciate that and then.
Speaker Change: As we think kind of longer term around the around the margin you talked about the new.
Speaker Change: <unk> forecast $3 35 to $3 40 this year.
Speaker Change: You are making changes to the balance sheet as you get larger you talked about adding that I mean is that a reasonable assumption for a normalized margin do you think for you guys at this point.
Speaker Change: As you look to the future, obviously theres a lot of.
Speaker Change: Things that can change but.
Speaker Change: Even kind of a normal yield curve.
Speaker Change: And where you envision the balance sheet ending by the by the end of the year is that seem like a reasonable place with the margin too.
Speaker Change: End of <unk>.
Speaker Change: Stabilize thanks Alright.
Yes, clearly a lot of variables out there that can move things around but as we mentioned we've done all we can to position as neutrally as possible and we do believe your statement is correct that is a good kind of mid term margin level to think about our organization.
Speaker Change: <unk>.
Speaker Change: Okay.
Speaker Change: Okay terrific. That's all I had thanks a lot. Thank.
Speaker Change: Thank you very much.
Speaker Change: Your next question comes from the line of Jon <unk> from RBC capital markets. Your line is open.
Speaker Change: Thanks, Good morning.
Speaker Change: Good morning, John.
Speaker Change: Got it.
Speaker Change: Can you touch a little bit you mentioned I think you mentioned green shoots in office and you talked about some stabilization. There can you give us some examples of what youre seeing happening and maybe your confidence that the worst is over there.
Speaker Change: Yes, I mean, I guess, what we're seeing I mentioned earlier, we're definitely seeing more natural resolution of the credits, we're seeing people refinancing away from us.
Speaker Change: We're seeing restructuring and.
Speaker Change: Amendments to deals where borrowers feel like they've got equity still in the building. So they are willing to right size alone and so I would just say the borrower behavior and some of what we're seeing in terms of refinancings away from us Paydowns and payoffs.
Speaker Change: Give us a pretty good indication and then just basically if you look at the level of classified criticized and non accruals in the office portfolio they've come down they've come down as a result, unfortunately right through charge offs overtime, but they have also come down because of some of these refinancings restructures and refinancing so we've seen we've seen.
Speaker Change: An absolute change kind of in some behaviors and thats to say not to say that we still don't have heightened levels of classified and non accruals in the office portfolio and that we're still kind of working through it but we do think that we've kind of turned the corner and at the existing portfolio. We have there now is stronger than the portfolio we have.
Speaker Change: I'd say at the beginning of last year.
Speaker Change: Okay. Good thats helpful.
Speaker Change: Follow up on Mark's question. The first one is there anything else other than category for from a regulatory point of view that's on your wish list.
Speaker Change: Assumption of regulatory leadership.
Speaker Change: Yes, we only have a few minutes left.
Speaker Change: I can't actually go off on a nice diatribe there but.
Speaker Change: I guess, what I would say.
Probably consistent with what a lot of Ceos would tell you is love to see a return to more tailored supervision and I think that probably captures everything which is.
Speaker Change: Look at organizations not based on artificial cutoffs of saw asset size or other things like that and come with a philosophy that you supervise banks.
Speaker Change: Commensurate with the risk profile and the activity as they engage in so.
Speaker Change: Think that we're at $80 billion now I don't think that if we're at $105 billion and we keep our same.
Speaker Change: Activity base in our same line of businesses in our same infrastructure that all of a sudden we create more systemic risk to the system that were any riskier. So maybe some lifting of artificial asset size threat.
<unk> thresholds would be terrific that may be a bridge too far but overall just more more tailored.
Speaker Change: Supervisory.
Speaker Change: Paradigm.
Speaker Change: I think we will get some of that but I think it will take some time.
Speaker Change: Okay. Thank you very much I appreciate it.
Thank you.
Speaker Change: And that concludes our question and answer session I will now turn the call back over to CEO, John Ciulla for closing remarks.
Speaker Change: Thank you very much everyone for joining us today I hope you have a great day.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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