Q4 2024 Hilltop Holdings Inc Earnings Call
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[music].
Good morning, ladies and gentlemen, and welcome Judy Hilltop Holdings fourth quarter 2024 earnings conference call and webcast at this time all lines are in English only knowledge.
Following the presentation.
We will conduct a question and answer session.
If anyone has any difficulties hearing the conference. Please press star zero for operator assistance at any time.
Speaker Change: I would now like to turn the conference over to Mike Dunn. Please go ahead.
Speaker Change: Thank you before.
Speaker Change: Before we get started please note that certain statements. During today's presentation that are not statements of historical fact, including statements concerning such items as our outlook business strategy future plans financial condition credit risks and trends in credit allowance for credit losses liquidity and sources of funding funding costs.
Speaker Change: <unk> stock repurchases subsequent events and impacts of interest rate changes as well as such other items referenced in the practice of our presentation are forward looking statements.
Speaker Change: These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainties.
Speaker Change: Our actual results capital liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in the purpose of our presentation and those included in our most recent annual and quarterly reports filed with the SEC.
Speaker Change: Please note that the information presented is preliminary and based upon data available at this time, except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information. Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share.
Speaker Change: A reconciliation of these measures to the nearest GAAP measure maybe found in the appendix to this presentation, which is posted on our website at IR hilltop Dot com.
Speaker Change: I'll now turn the presentation over to Jeremy Ford.
Jeremy Ford: Thank you, Matt and good morning, before we cover the results from the quarter I would like to spend some time reviewing the full year of 2024.
Jeremy Ford: During the year, we saw a dramatic shift in the fed's posture regarding inflation and their corresponding target rate.
Jeremy Ford: The F O M C cut rates three times in 2024 totaling 100 basis points of reduction.
Jeremy Ford: Further the yield curve realize the material change in shape as long term rates, namely the 10 year Treasury note fluctuated over 100 basis points from peak to trough over the course of the year.
Speaker Change: Through prudent management hilltop produced an increase in consolidated pretax income year over year. Despite the volatility of both short and long term rates.
Speaker Change: Further during the year hilltop realized growth in core deposits at Plains capital Bank enhanced our liquidity position by returning noncore excess funding continued progress towards operational efficiency with improved financial results at prime lending.
Speaker Change: That's it further in the foundational business and its at Hilltop Securities and returned $64 million to stockholders.
Speaker Change: As we embark upon a new year, we will continue to focus on risk management down balance sheet positioning and the commitment we have.
Speaker Change: To serve our customers and communities, which we believe will drive long term value creation through economic cycles, with our synergistic and durable business model.
Speaker Change: Moving to the fourth quarter hilltop.
Speaker Change: Hilltop reported net income of approximately $36 million or <unk> 55 per diluted share return on average assets for the period was <unk>, 9% and return on average equity was six 5%.
Speaker Change: Favorable operating results from the banking and broker dealer business units helped to produce a quarter over quarter and year over year increase in pretax income.
Speaker Change: I'll talk realized another quarterly improvement in net interest income primarily due to our growth in average earning assets.
Speaker Change: Consolidated net interest margin at hilltop and net interest margin at the bank did experience compression in the quarter.
We will comment further on the bank's NIM later in our prepared remarks.
Speaker Change: During the quarter plain capital Bank generated $51 million of pre tax income on $13 $3 billion of average assets, representing a return on average assets of $1 two 4%.
Speaker Change: Average loans at the bank declined by approximately 1% in the quarter.
Primarily due to a modest decrease in average core loan balances on a linked quarter basis.
Speaker Change: The bank realized an increase in its loan production pipeline pull through rate as borrowers grow more accustomed to the new interest rate environment.
Speaker Change: We expect that it will take several quarters for the increase in borrower activity to materialize into an increase in funded loans held on our balance sheet.
Speaker Change: Average deposit balances at the bank increased by nearly $600 million during the quarter, which was driven by an increase in both core interest bearing deposits and noninterest bearing deposits.
Speaker Change: The increase in core interest bearing deposits represents the fourth straight quarter of growth.
Speaker Change: Results in the quarter at the bank included a reversal of provision for credit losses of $5 $7 million. This recapture was primarily due to a positive migration in the loan portfolio as total criticized loans declined by approximately $34 million during the quarter.
Speaker Change: As well as an improvement in collective economic conditions.
Speaker Change: Will is going to provide further commentary on credit in his prepared remarks.
Speaker Change: The bank realized a seven basis point compression in net interest margin from the third quarter to 298%.
Speaker Change: This change was primarily attributable to the immediate repricing of cash held at the fed which experienced growth and balanced during the quarter as the rates on both earning assets and interest bearing liabilities declined.
Speaker Change: Overall, the bank showed steady improvement through the year.
Speaker Change: Terms of funding credit quality and loan pipeline growth.
Speaker Change: Yeah.
Speaker Change: Moving to prime lending for.
Speaker Change: The company reported a pretax loss of $9 $9 million during the quarter the quarter over quarter decline in operating results was primarily driven by a reduction in origination lock volumes during the fourth quarter.
Speaker Change: Notably Prime lending did experience an increase of $438 million in origination volume compared with the fourth quarter of 2023.
Speaker Change: Gain on sale of loans sold to third parties increased by two basis points when compared to the third quarter. However, prime lending experienced a continued downward trend in mortgage origination fees and other related income, which decreased by five basis points quarter over quarter.
Speaker Change: While management at Prime lending has prudently trends fixed expenses by 14% when compared to the fourth quarter of 2023, we believe the challenging mortgage market will continue to negatively weigh on prime lending operating result in the seasonally slower first quarter of 2025.
Speaker Change: In the fourth quarter Hilltop Securities generated pretax income of $20 million on net revenues of $125 million for a pretax margin of 16% sticking.
Speaker Change: Speaking to the business lines at Hilltop Securities.
Speaker Change: Public Finance services produced a 32% increase in net revenues on strong offering volumes amidst a record year of industry issuance of $508 billion of total volume.
Speaker Change: Structured finance net revenues increased by $9 million from the fourth quarter 2023. This year over year growth was primarily driven by improved secondary margins and the TBA business. Despite the volatile mortgage market.
Speaker Change: In wealth management net revenues increased by $2 million compared to the last year's fourth quarter as an increase in retail and clearing fees and interest revenue more than offset a modest decline in sweep revenue from the firm's FDIC suite program.
Speaker Change: Finally, the fixed income business remains pressured due to challenging market conditions and the business unit realized a decline in net revenues of $10 million when compared to the fourth quarter of 2023.
Speaker Change: Overall hilltop Securities delivered strong results in the fourth quarter as the public finance structured finance and wealth management business lines close out the year with positive quarterly and annual results.
Speaker Change: The broker dealer delivered a healthy pre tax margin for the fourth quarter and for the full year, an increase revenues for both time periods.
Speaker Change: The firm continues to show an ability to provide diversified income streams across varying rate environments.
Speaker Change: Moving to slide four.
Speaker Change: Hilltop maintains strong capital levels with a common equity tier one capital ratio of 21%. Additionally, our tangible book value per share increased from year end 2023 by $1 14 to.
Speaker Change: The $29 49.
Speaker Change: During the period, we returned $11 million to stockholders through dividends.
Thank you I will now turn the presentation over to will to discuss our financials in more detail.
Will: Thank you Jeremy I will start on page five.
Speaker Change: As Jeremy discussed for the fourth quarter of 2020 for Hilltop reported consolidated income attributable to common stockholders of $35 $5 million equating to <unk> 55 per diluted share.
Speaker Change: The fourth quarter results reflect a few notable items, including a $5 9 million provision for credit loss recapture which reflects the combined impact of positive credit migration during the period and an improved economic outlook versus the third quarter.
Speaker Change: In addition, during the quarter, we recognize a negative valuation adjustment of $5 million.
Speaker Change: <unk> two in one office facility that management intends to exit and sale.
Speaker Change: While we are making progress on this sale. It has not closed and as a result, you'll talk may have additional adjustments related to this transaction in future periods.
Speaker Change: Lastly, during the period hilltop recognized tax benefits related to various state income tax filings and certain discrete items in the fourth quarter.
Speaker Change: The impact of these tax items equates to approximately $3 million on an after tax basis.
Speaker Change: Further these tax items reduced the GAAP effective tax rate in the quarter by approximately 7% to 14, 2%.
Speaker Change: Moving to page six.
Speaker Change: For the full year of 2020 for Hilltop reported consolidated income attributable to common stockholders of $113 million equating to $1.74 per diluted share.
Speaker Change: During the year net interest income declined by 11% and that was largely offset by lower provision expense in 2024, which equated to approximately $1 million for the full year.
Speaker Change: I'll address the allowance for credit losses in more detail later in my comments.
Speaker Change: A few additional items of note.
Speaker Change: While not included in the 2024 results we disclosed on January 15th on form 8-K.
Speaker Change: We had redeemed all outstanding senior notes that were due to mature on April 15th of 2025.
Speaker Change: These notes were redeemed for cash on hand.
Speaker Change: In addition, Lasalle.
Speaker Change: Hilltop announced in a press release on January 27th and our merchant banking group Hilltop opportunity partners has agreed in principle to sell its ownership position in <unk> energy systems.
Speaker Change: The after tax gain for this transaction is estimated between 23 and $27 million.
Speaker Change: It is important to note that this transaction is expected to close during the first quarter of 2025, but importantly has not closed at this time.
Speaker Change: The estimate variety is subject to change if this transaction were to be modified in any material mayor prior to close.
Speaker Change: Turning to page seven.
Speaker Change: Botox allowance for credit losses decreased during the quarter by $9 8 million to $101 million.
Speaker Change: While management continued to leverage the Moody's <unk> scenario and its assessment of ACO.
Speaker Change: The macroeconomic outlook improved in the fourth quarter, reflecting a lower probability of recession.
Speaker Change: Prior periods.
Speaker Change: Further the portfolio experienced client specific improvements in overall risk score, which additionally, reduced the ACL during the period.
Speaker Change: These benefits were always somewhat offset by higher specific reserves related to certain individually evaluated credits.
Speaker Change: Lastly, the ACO roll forward includes net charge offs, which largely reflects our best estimate of walls for one of the auto portfolio credits, we've discussed over the last few quarters.
Speaker Change: Allowance for credit losses of $101 million yields an ACL to total loans <unk> ratio of 127%.
Speaker Change: As of December 31, 2024.
Speaker Change: I will address additional credit trends later in this presentation.
Speaker Change: Presentation.
Speaker Change: As we've seen over time ACO can be volatile as it's impacted by economic assumptions as well as changes in the mix and makeup of the credit portfolio.
Speaker Change: We continue to believe the future changes in the allowance for credit losses will be driven by net loan growth in the portfolio credit migration trends and changes to the macroeconomic outlook over time.
Speaker Change: Turning to page eight.
Speaker Change: Net interest income in the fourth quarter equated to $105 5 million and included $1 $1 million of purchase accounting accretion.
Speaker Change: As expected.
This margin decline versus the third quarter of 2024, following about 12 basis points to 272 basis points.
Speaker Change: While minimizing NIM compression remains a focus we are pleased that net interest income remained stable versus the third quarter of 2024 levels.
Speaker Change: Overall deposit cost decline once the federal reserve began moving the federal funds rate lower.
Speaker Change: Also of note average excess cash reserves increased to just under $2 billion as we experienced growth in client deposits and declines in loans held for sale and loans HSI.
Speaker Change: The growth in cash levels do pressure NIM.
It increases overall asset sensitivity for the organization.
Speaker Change: Turning to page nine we have more discussion topics related to NII.
Speaker Change: In the Upper left chart, we provided detail into our latest sensitivity analysis for NII related to parallel instantaneous shocks and interest rates.
Speaker Change: As noted in the chart hilltop remains approximately six 5% asset sensitive in the up 100 scenario.
Speaker Change: Over the past few years, we have reduced our asset sensitivity by approximately 50% from 12% to six 5%.
Speaker Change: Going forward the most significant driver of our outperformance will be driven by our ability to manage interest bearing deposit betas, which are currently modeled at 54% through the cycle.
Speaker Change: As it relates to deposit betas.
Speaker Change: We have achieved a 62% interest bearing deposit beta in response to the federal Reserve's first 100 basis points of rate reductions.
Speaker Change: While this beta level is encouraging we remain focused on managing deposit costs to support both improved profitability and long term deposit growth.
Speaker Change: In the lower left of the page, we highlight that our longer term target for asset sensitivity is 2% to 4% and we're executing on a number of strategies to move our export exposure towards these levels in a prudent and methodical manner overtime.
Speaker Change: In addition, the tables on the right of the page highlights the interest rate reset schedule for our variable rate loans, they place capital way.
Speaker Change: As a show the majority of the variable rate portfolio will reset within 30 days following any rate action set forth by the fed.
Speaker Change: Turning to page 10.
Speaker Change: Fourth quarter average total deposits are approximately $11 billion remaining largely stable with the fourth quarter of 2023.
Speaker Change: On an ending balance basis deposits increased by $274 million from the third quarter of 2024, driven largely by growth from existing clients.
Speaker Change: As a result of our ongoing pricing efforts average interest bearing deposit costs declined to 347 basis points increase of 35 basis points from the prior quarter.
Speaker Change: Currently we expect that interest bearing deposit costs will move somewhat lower over the coming quarter and then stabilize until we see additional movement by the federal reserve on short term rates.
Speaker Change: Turning to page 11.
Speaker Change: Total noninterest income for the fourth quarter of 2024 equated to a $196 million.
Speaker Change: Fourth quarter mortgage related income and fees increased by $4 million.
Versus the fourth quarter of 2023, driven by improvement in both lock and closed volumes versus the same period in the prior year.
Speaker Change: While signs of improvement in our mortgage business are emerging.
Speaker Change: Some of the significant macro challenges persist whereby the combination of higher interest rates home price inflation.
Speaker Change: Limited housing supply continued to pressure volumes and margins.
Speaker Change: Versus the same period prior year purchase mortgage volumes increased by $212 million or 12% and refinance.
Speaker Change: <unk> volumes increased by $226 million.
Speaker Change: During the fourth quarter of 2020 for gain on sale margins remained relatively stable with third quarter levels for loans sold to third parties.
Speaker Change: During the fourth quarter higher third party sweep fees drove the increase in securities and investment fees and commissions. In addition, structured finance continued to produce strong results during the quarter as overall capital market activity supported margins, even while overall lock activity declined to 667 million.
Speaker Change: Of note same period prior year lock volumes were substantially impacted by certain states, providing additional state funding to support their state housing authorities and down payment assistance programs.
Speaker Change: As we've noted in the past it's important to recognize that both fixed income services and structured finance businesses at hilltop securities can be volatile from period to period as they are impacted by interest rates overall market liquidity and production trends.
Speaker Change: Turning to page 12.
Speaker Change: Noninterest expenses increased from the same period in the prior year by $12 million to $263 million.
Speaker Change: Driving the increase in noninterest expense were higher variable compensation expenses, principally within the mortgage and securities businesses.
Speaker Change: Also of note the negative valuation adjustment that I referenced earlier is included in the expenses other than variable compensation and again equated to $5 million in the fourth quarter 2024.
Speaker Change: Looking forward, we expect expenses other than variable compensation to remain relatively stable between 185 and $190 million per quarter as the ongoing focused efforts related to streamlining our operations and improving productivity continue to support head count and improved throughput across our franchise.
Speaker Change: Hoping to offset the ongoing inflationary pressures that persist in the market.
Speaker Change: Moving to page 13.
Speaker Change: Fourth quarter average <unk> loans equated to $7 9 billion.
Speaker Change: On a period end basis, <unk> loans declined versus the third quarter of 2024 by $29 million.
Speaker Change: Driven by a modest paydown activity in our commercial lending business.
Speaker Change: While the economy in Texas remains resilient, we do expect it to competition for funded loans will remain very intense as.
As we look into 2025, we are expecting full year average bank loan growth.
Speaker Change: Between two and 5%.
Speaker Change: This outlook includes the bank's retention of prime lending mortgage loans.
Speaker Change: I'm moving to page 14.
Speaker Change: As is shown in the chart on the bottom left of the page net charge offs for the fourth quarter equated to $3 9 million.
Speaker Change: As noted earlier, the most significant charge off in the period related to one of the large auto note finance credits, which equated to $3 6 million.
Speaker Change: For the full year of 2024, net charge offs equated to $11 2 million or 14 basis points of period in <unk>.
Speaker Change: We believe the credit quality remained stable across the portfolio and do not currently see a large systemic areas of concern.
Speaker Change: However, we are monitoring our loans and borrowers closely is the persistence of higher interest rates and potentially lower real estate utilization rates in commercial real estate could have a negative impact on our clients and our portfolio.
Speaker Change: As is shown on the graph the bottom right of the page the allowance for credit loss coverage. The bank ended the quarter at 133% <unk>.
Speaker Change: Including mortgage warehouse lending.
Speaker Change: Moving to page 15.
Speaker Change: As we move into 2025, there continues to be a lot of uncertainty in the market regarding interest rates inflation and the overall health of the economy.
Speaker Change: That said, we have provided our current outlook metrics for the coming year.
Speaker Change: As we've noted in the past we're pleased with the work our team has delivered to position our company for long term success.
Speaker Change: Outlook for 2025 reflects our current assessment of the economy and the markets, where we participate.
Speaker Change: Further as the market changes and we adjust our business to respond we will provide updates to our outlook on our future quarterly calls.
Speaker Change: Operator that concludes our prepared comments and we'll turn the call back to you for the Q&A section of the call.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: I have a question. Please press the star followed by the one on your Touchtone phone.
Speaker Change: Questions will be taken and do you want to receive should you wish to cancel your request. Please press the star followed later too.
Speaker Change: If you are using a speaker phone.
Speaker Change: Please lift the handset question any tier one.
Speaker Change: Once again that is star one should you wish to ask a question.
Speaker Change: Your first question is from Michael Rose from Raymond James Your line is now open.
Michael Rose: Hey, good morning, guys. Thanks for taking my questions.
Speaker Change: Good morning, Good morning, I'll start on the on the merchant good morning, maybe we could just start on the on the merchant banking gain.
Michael Rose: Obviously that will add to capital.
Speaker Change: I know you guys just announced the buyback.
Speaker Change: Any plans for anything like an ASR like you've done in the past or to be maybe a little bit more aggressive with the buyback at this point just trying to kind of appreciate the capital priorities and if theres been any changes just given the suspected gang. Thanks.
Speaker Change: Yes.
Speaker Change: The priorities haven't changed because of the specific gain.
I think that we have.
Speaker Change: Just got authorization for $100 million share repurchase for the program for the year.
Speaker Change: It's not an ASR, it's just going to be during open windows and so we're certainly evaluating that.
Speaker Change: And.
Speaker Change: And I think that we are open to be active with our share repurchase to our authorization. This year last year, we were.
Speaker Change: We started the year in <unk>.
<unk> ended about $20 million, but we we.
Speaker Change: We held off because we had these looming debt maturities that we wanted to make sure we had optimal flexibility for it.
Speaker Change: Yes.
Speaker Change: Okay. That's that's helpful and then.
Speaker Change: Maybe if you could just help me better appreciate the loan growth.
Speaker Change: Outlook.
Speaker Change: It's fairly wide can you just give us some.
Speaker Change: Assumptions around what you're assuming for Paydowns I know the auto book is still.
Speaker Change: Somewhat of a headwind although declining can you just talk about <unk>.
Speaker Change: Aro activity pipeline things like that it seems like Theres a lot of optimism in the market, but we haven't really seen it come through in.
And the actual industry data yet so just just trying to better appreciate what could drive you to the lower end versus the upper end.
Speaker Change: Yes.
Speaker Change: The range is a little wide we're at the early part of the year it.
Speaker Change: It seems to be.
Speaker Change: A pretty pretty substantive didn't ask around where we're the fed's got to land the plane here in terms of this rate cycle. So.
Speaker Change: Trying to trying to reflect that as well I think we've seen pipelines build really through midway in the third quarter into the fourth quarter. Certainly that's continued here from a commercial commercial lending perspective.
Speaker Change: That said just for US a lot of our a lot of our activity as you know commercial real.
Real estate oriented so that means we will book the commitment it will take.
Speaker Change: Our customers will then work through their equity installations, and then they'll start to borrowing process. So while we've got strong pipelines and strong activity.
Speaker Change: That may not manifest itself in terms of actual fundings on the balance sheet for a couple of quarters and so our outlook kind of captures that as well we did see as we noted on prior calls some softness in the late first and second quarter last year, which are kind of causing a little bit of a slower start as you can see we're also expecting to retain.
Speaker Change: Loans that are originated at prime mortgage loans, we expect deprecation to be 10.
Speaker Change: To $30 million per month, we evaluate that on an economic basis. So it is not.
Speaker Change: It's not an auto drive.
Speaker Change: Matter in the context of just kind of turning it on at a level and forgetting about it.
Speaker Change: We will evaluate.
Speaker Change: Pricing will evaluate the overall return profile and so that range in and of itself puts you anywhere from $120 million retained to 360 retained so those are the kinds of things that start to put you.
Speaker Change: Within the range of 2% to 5% of the entire portfolio and some of the variability.
Speaker Change: As we have.
Speaker Change: We're going to be thoughtful and prudent about how we put capital to work both from a credit perspective, but also.
Speaker Change: Duration, an asset liability perspective, as it relates to mortgages, we're going to retain.
Speaker Change: Yes, that's a good point on the mortgage retention because I think it was zero to $20 million last year and now you bring it up a little bit.
Speaker Change: Correct.
Speaker Change: Maybe just maybe just finally for me I am sorry, if I missed some of the margin commentary, but appreciate the NII guide.
Speaker Change: Guide.
Speaker Change: If we don't get.
Speaker Change: The two rate cuts that you have built in would you be closer would you be at the lower end or could you potentially be.
Speaker Change: Less than that just given some of the competitive dynamics or is that range kind of contemplate somewhere between zero to.
Speaker Change: And is that the way, we should kind of think about it or does the guide really just kind of encapsulate the two cuts.
Speaker Change: Yes.
Speaker Change: The guiding capsulate, the two cuts across across the year.
Speaker Change: We're asset sensitive so so candidly less cuts necessarily improves net interest income.
Speaker Change: As a practical matter so.
Speaker Change: From our perspective.
Speaker Change: We'll wait and see where the fed is with the guidance. We've got in place right. Now is kind of two two fed cuts one in there.
Speaker Change: Middle of the year, one of the third quarter and we'll continue to watch those we're going to continue to make progress on overall deposit costs.
Speaker Change: I think it's important to note, we've got our CD portfolio, which we had structurally moved.
Speaker Change: To shorten up over the last 12 to 18 months, we've done that the largest portion of that force portfolio sits in kind of a 90 day product over the next 90 days, we've got about $650 million of Cds to come to mature those who've got a blended average rate of around 430 basis points in the current offering for that product through.
Speaker Change: 95%. So we're going to continue to see just through the natural matriculation of the balance sheet as well as some of the decisions we've made.
Speaker Change: As to how we position the liability side, we're going to see some of that benefit which was part of the comment around we expect to see.
Speaker Change: Deposit rates continue to fall through the through the first quarter than they likely start to stabilize.
Speaker Change: Up until up until we see the fed make a definitive move from here.
Speaker Change: Perfect. Thanks for all the color I appreciate you taking my questions.
Speaker Change: Thank you.
Speaker Change: Your next question is from Stephens Cowan from Piper Sandler Your line is now open.
Speaker Change: Yes, Thanks I appreciate it guys.
Speaker Change: Curious how the how you guys are thinking about structured finance revenues for 2025, obviously, a really nice year.
Speaker Change: Year end 'twenty, four and you guys talked about the down payment assistance programs and the benefits there.
Speaker Change: And what's that kind of environment looking like as you see it today and do you feel like that can continue to grow after this let's call it $100 million figure from 2024.
Speaker Change: So well good morning, and I think from a structured finance perspective as we've noted.
Speaker Change: Benefited for the last couple of years from.
Speaker Change: One of our one of our larger state housing authorities continuing to and the state putting in additional funds to support their down payment assistance program. We don't have any control of that they obviously operate independently in that regard and so as a result.
Speaker Change: If they chose to continue to support the program through their annual budgeting process. We obviously believe that would be favorable to the constituents in the state, but also our structured finance business. If they didn't we would obviously expect revenues in structure finance would be lower as a result of not having <unk>.
Speaker Change: That support versus the prior couple of years, where we've seen it so.
Speaker Change: Thats a little bit of an unknown, we certainly can't comment on.
Speaker Change: On either state budgeting processes, but.
Speaker Change: That really is an added variable that's outside of kind of capital markets, our overall product wherewithal.
Speaker Change: Got it Okay and then.
Speaker Change: Like you said, it's a little unclear, maybe where where rate cuts how many of them, we get when they come and so forth but.
Speaker Change: How do you think about the asset sensitivity of the balance sheet over the longer term.
Speaker Change: I think you've said before maybe.
Speaker Change: <unk> asset sensitivity over time, increasing retention with some of the hybrid mortgages potentially to do that kind of what's the.
Speaker Change: That's the goal and the targeting what beyond that those hybrid mortgages might you change around the balance sheet to inflict this differently.
Speaker Change: Yes. So in my comments, we noted in here on page nine of our document we show.
Speaker Change: Our longer term targets kind of two 4% asset sensitive obviously.
Speaker Change: Our mortgage company provides some counter cyclical more liability sensitive.
Speaker Change: Components to it in terms of overall income profile, but as it relates to NII.
Speaker Change: 2% to 4% asset sensitive and you can see here we.
Speaker Change: I will start and have restarted.
Speaker Change: The investment in our securities portfolio.
Speaker Change: Worth, noting that portfolio peaked at about $2 $75 billion.
Speaker Change: Currently as a book value of about $2 to $5 billion and we'll reinvest those cash flows I think we've reached a point where the reinvestment opportunity provides a better return and more stable stable earnings profile and the cash yields necessarily would so we're starting that process. As you noted the increase the return.
Speaker Change: Of the three five and seven year hybrid fixed fixed rate mortgages. We believe believe those products both from a profile perspective as well.
Speaker Change: As an overall credit perspective fit our.
Speaker Change: Our profile from a longer term perspective, youll see in our guidance, we did increase the retention level of expectations.
Speaker Change: $10 million to $30 million per month.
Speaker Change: And then we will continue to kind of move.
Speaker Change: Our deposit base remains strong and will continue to kind of move broker dealer sweep deposits out.
Speaker Change: It is out of place capital bank back to the broker dealer and they can put them to work and they are in their third party Bank program. So those are the types of things, we're doing right now to start to drive and push that asset sensitivity down as I noted in my comments, we have seen cash levels increase sustainably.
Speaker Change: Ending the period at the bank at just over $2 billion.
Speaker Change: And obviously cash excess cash reserves at the fed at 100% beta.
Speaker Change: Significant asset sensitivity. So as we continue to work that cash level down to our target level, which as we've stated is $300 million to $750 million versus the $2 billion, we will see that asset sensitivity level decline overtime, but as I noted in my comments, we're not we're not looking to kind of move the balance sheet quickly we will move it over.
Speaker Change: Time, and prudently with a focus on return to long term positioning and that.
Speaker Change: We will continue to evolve as the economic environment evolves.
Speaker Change: Got it that's extremely helpful. Thank you and then last thing for me is this.
Speaker Change: There's been maybe a little bit more volatility around the quarter over quarter provision then maybe I'm used to seeing sometimes in.
Speaker Change: Reversals and then there was a larger provision in the second quarter.
Speaker Change: I know, that's episodic or credit, obviously I know, but.
Speaker Change: Can you kind of talk about how you guys think about the provision and if.
Speaker Change: I don't know if you have maybe a more fluid views than others may have I'm, just trying to get a feel for what kind of has caused some of that volatility around the build versus the reversals and kind of how you think about it in 'twenty.
Speaker Change: Yes so.
Speaker Change: Obviously, we feel like we we're kind of following the allowance for credit loss guidance from a GAAP perspective adopt.
Speaker Change: Adopting and adapting a.
Speaker Change: Economic.
Speaker Change: <unk> outlook, each each period through our controls and governance process that we believe kind of most reflects where management believes the economy is going obviously theres been some volatility from an economic perspective. So that's one part and you should see that I think universally it's worth noting we only use one scenario. So we don't we do.
Speaker Change: Wait if you will or probability adjust to multiple scenarios, which which may allow others I can't speak to that but it may may allow others to have a little less variability there, but we do it we do leverage one scenario because we think that generally provides the cleanest greenest perspective.
Speaker Change: The other part has been the auto loan portfolio, which honestly.
Speaker Change: As we noted late last year started to manifest itself. We took some significant reserves. We then have started to through the workout process <unk> reserves as I noted earlier, we had a net charge offs, which obviously.
Speaker Change: <unk>.
Speaker Change: The swing on the overall reserve balance as well so.
Speaker Change: Portfolio activity throughout the course of this year is also kind of created some variability that might've been outside of.
Speaker Change: Outside of normal.
Speaker Change: Got it yes extremely helpful probably right about those differences to think.
Speaker Change: Thank you.
Will Delay: Thank you. Your next question is from will delay from Colby <unk> of UBS. Your line is now open.
Speaker Change: Hey, good morning, guys.
Will Delay: Good morning, good morning.
Just one more follow up on the asset sensitivity in the in the bond book.
Will Delay: Do you have.
Will Delay: Cash flows youre expecting from the securities portfolio in 2025 and <unk>.
Will Delay: How should we think about the incremental yeah.
Will Delay: Yield pick up there.
Will Delay: Yes, so the cash flows it's an estimate but cash flows between 250 $300 million on a full year basis.
Will Delay: Think about the weighted average yield on the portfolio at a REIT at right at 310 basis points.
Will Delay: And.
Will Delay: The reinvestment yield today, and I think thats, where it becomes difficult, but we believe the reinvestment yield today will be between $450 million.
Will Delay: 475 basis points, obviously is the rate as the rate paradigm shifts that could change.
Will Delay: But we believe theres, probably about 150 basis points of pickups in positive carry on that rollover balance as we as we go go throughout the year.
Speaker Change: Okay. That's helpful. And then I wanted to shift over to deposits I mean, it was it was a really strong quarter for deposit growth.
Speaker Change: Any color on the on the trends there.
Speaker Change: I think during the during the quarter and really during the second half of the year we had.
Speaker Change: Strong customer activity.
Both in terms of just normal flows and activity, but also we did have some I would say episodic events, where we had customers that were able to sell their businesses liquidate properties exit exit properties and the like and so that did drive up kind of year end year end analysis, we expect to see through the first quarter some of that normalize as those customers.
Speaker Change: Or start to put those funds to use in either new products or move them out for wealth management purposes, and the like so.
Speaker Change: We do think.
Speaker Change: We probably hit a high water Mark at 12, 31, we'll start to see that normalize in.
Speaker Change: In the first quarter for normal reasons, like dividend distributions and payments and incentive payments and the like tax payments, but also some of those some of those larger more episodic events those customers starting to make longer term decisions around where that where that cash will be.
Speaker Change: That said I do think we continue to focus on growing our treasury services platform as well as further integrating with our customers around their operating accounts and the like so it is a foundational strategy and approach for us to continue to grow deposits, which we would expect to do but that said we did have some episodic favorable.
Speaker Change: <unk> in the in the fourth third and fourth quarter that kind of move deposit balances higher.
Speaker Change: Got it.
Speaker Change: And then lastly, just shifting over to credit criticized.
Speaker Change: Nice step down.
Speaker Change: Just any.
Speaker Change: Detail you can provide on on upgrades you saw there.
Speaker Change: Yes, I mean, we saw as I noted in my comments I mean, we saw a few very specific.
Speaker Change: Upgrades one in particular was our commercial real estate space.
Speaker Change: We've had some customers and some property that we had some customers put forth.
Speaker Change: Some additional capital there and.
Speaker Change: And cash flows.
Speaker Change: Started to started to improve as a result of that so.
Speaker Change: This is one of those processes that we evaluate each quarter and again as I noted, we just we look across the portfolio. We don't see large systemic credit risk exposures in place, but we continue to monitor each credit closely kind of one by one in this particular scenario, though it was one of our real estate real estate cuts.
Speaker Change: <unk> received an upgrade in the period.
Speaker Change: Alright, Thats all for me thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Thank you. Your next question is from Jordan <unk> with Stephens. Your line is now open.
Speaker Change: Hello Gordon Your line is now open are you on mute.
Speaker Change: Hello, Jordan.
Speaker Change: It seems like the loss Jordan.
Speaker Change: There are no further questions at this time the question and answer session is now closed.
Speaker Change: Ladies and gentlemen, the conference has now ended.
Speaker Change: You all for joining you may now disconnect your lines.