Webster Financial Corp (WBS) 2024 Q4 法說會逐字稿

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. Harmon.

Please go ahead.

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 of 1995 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 of companying management's remarks can be found on the company's Investor Relations site at investors.websterbank.com. For the Q&A portion of the call, we ask that each participant asks just one question and one follow-up before returning to the queue.

I'll now turn the call over to Webster Financial's CEO, John Ciulla.

Thanks, Emlen.

Good morning and welcome to Webster Financial Corporation's fourth quarter 2024 earnings call.

We appreciate you joining us this morning.

I'll provide some high level remarks on our performance, after which our CFO, Neal Holland, will cover the financials in more detail.

Our President and Chief Operating Officer, Luis Massiani, is also joining us for the Q&A portion of the call today.

The company again realized a number of strategic achievements in 2024 as we continue to deliver for our clients and position the bank for the future.

We took 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 continue to add off balance sheet funding capacity, further enhancing our liquidity profile.

The acquisition of Ametros early in the year added a new source of low cost, long duration deposits with a fantastic growth opportunity.

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 a Ametros' client base, increasing industry, adoption of settlement administration and exploring alternate markets for Ametros' products and services.

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.

From a financial perspective, we grew both loans and deposits amidst a challenging year for the banking industry on both fronts.

Loan growth was driven by our C&I and residential mortgage setting Webster up for balanced loan growth into the future.

Our full year financial results continue to be among the best of our like-sized peers including an adjusted return on tangible common equity of 17.5%, adjusted return on assets of 1.23%, and an efficiency ratio of 45.4%.

Turning to slide 3, 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 1.27%, and an efficiency ratio of just below 45%.

Loans and deposits continue to grow, our net interest margin expanded, and we have some unique non-interest income opportunities in the quarter.

On slide 4, we continue to be very proud of the differentiated funding profile we have built at Webster and it 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 as we move into 2025 and beyond.

As previously noted, we added Ametros, 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.

HSA Bank grew its deposits by $800 million in the year, in part attributed to the launch of the HSA invest platform which helps ensure seamless access between an HSA account holder and their investments.

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 commercial bank deposit growth benefited from the expansion of our 1031 exchange business and emphasis of bilateral relationships with our commercial real estate and middle market clients.

We continue to grow our client base at 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 5, we continue to provide metrics on the CRE 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.

Outside of office and healthcare services, we are not seeing any other pockets of correlated weakness.

On overall credit, despite a higher level of charge offs in the quarter, we see underlying credit migration trends moderating and still believe we're looking at a mid-2025 inflection point on overall credit metrics.

In the quarter, net charge off total just over $60 million, with 60% of those charges coming from traditional office related or healthcare services credits, the two portfolios we've been talking about over the past year.

We still believe a normalized annualized charge off rate is 25 basis points to 30 basis points, with some volatility quarter to quarter, given the commercial bias of our portfolio. 2024 overall net charge offs approximated 30 basis points, the high end of that range.

With that, I'll turn it over to Neal to provide some additional detail on our solid financial performance in the quarter.

Thanks John and good morning everyone.

I'll start on slide 6 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. Adjustments consisted of a pretax $57 million securities repositioning charge and a $29 million deferred tax asset valuation charge.

Turning to slide 7.

Total assets were $79 billion at period end, effectively flat to last quarter as growth in loans and securities were offset by lower levels of cash at period end.

The loan to deposit ratio increased modestly to 81.1%.

Capital remained in a strong position as retained earnings largely offset the impact of greater unrealized security losses.

Loan trends are highlighted on slide 8.

In total, loans were up $558 million or 1.1% 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.

CRE 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 attractive risk reward characteristics.

The yield on the loan portfolio was down 26 basis points, driven by the effects of the 100 basis points of Fed cut since September on our floating rate loan portfolio.

We provide additional detail on deposits on slide 9.

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 of public fund deposits, DDA balances increased by $75 million, marking the second consecutive quarter of growth.

Moving to slide 10.

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.

Net interest income benefited from a modest expansion in NIM and growth in interest earning assets.

Non-interest income was up $16 million over the prior quarter as we realized a large direct investment gain and saw a positive swing in the derivative valuation adjustment.

Adjusted expenses were up $12 million over the prior quarter and our provision was up $9 million.

Excluding adjustments, our tax rate was 20.7%.

Overall adjusted net income was up $15 million, relative to the prior quarter.

Efficiency ratio came in at 45%.

On slide 11, we highlight net interest income, which increased $19 million or 3.2% in the quarter, driven by balance sheet growth and a modest increase in the net interest margin.

The NIM was up 3 basis points to 3.39%.

In the fourth quarter, we incrementally sold securities with a book value of $665 million and reinvested with approximately 300 basis point improvement in yields, a nominal impact to capital ratios.

We anticipated earn back on the transaction of three years.

We reduced our total deposit costs by 16 basis points in the quarter.

Slide 12 illustrates our interest income sensitivity to rates.

We have 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 environments.

On slide 13, with non-interest income, adjusted non-interest income was $109 million, up $16 million over the prior quarter.

Excluding the direct investment gain and the positive CVA in the quarter, non-interest income would have been roughly $95 million.

Underlying business activity remained consistent to the prior quarter.

Turning to slide 14, we have details on non-interest expense.

We reported adjusted expenses of $340 million, up from $328 million in 3Q.

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.

Slide 15 details components of our allowance for credit losses, which was up $2 million relative to the prior quarter.

After booking $61 million in 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 healthcare service related credits.

Slide 16 highlights our key asset quality metrics.

As you can see on the left-hand side of the page, risk grain migration slowed in the quarter with nonperforming assets of 8% and commercial classified loans up 17%.

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 $32.95 per share from $33.26, reflecting the impact of AOCI.

For full year 2025 outlook, appears on page 18.

We anticipate loans will grow 4% to 5% on an end-of-period basis, with growth driven by a diverse mix of asset classes.

We also expect deposits will grow 4% to 5% on an end-of-period basis.

We anticipate net interest income of $2.45 billion to $2.5 billion on a non-FTE basis.

For those modeling net interest income on an FTE basis, I would add roughly $55 million to the outlook.

Our outlook assumes 225 basis point Fed funds reductions beginning in March.

We expect noninterest income will be $370 million to $390 million.

We anticipate expenses will be in the range of $1.39 billion to $1.41 billion, with an efficiency ratio of between 45% and 47%.

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 4 bank.

We are prioritizing investments that enhance our operating foundation, including data reporting, frontline controls and treasury management.

Over the next several years, we believe we will add between $40 million to $60 million in run rate operating expenses, inclusive of the amount realized in 2025, that we'll make the bank Category 4 ready under the existing proposals.

We continue to anticipate our effective tax rate will be approximately 21%.

Our near-term common equity Tier 1 ratio target remains 11%.

With that, I will turn it back to John for closing remarks.

Thanks, Neal.

As Neal just noted, we are proactively investing in Webster's future investments.

Investments 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 and earlier mitigation of risk management concerns.

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 remarks, I mentioned some of the opportunities we see to expand Ametros' addressable market.

Also contemplated in our outlook, our business development investments across our various business segments that will drive the company's performance well beyond 2025.

In 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 in HSA, we will continue to improve our user interface and analytics capabilities that improve client engagement.

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.

Before I wrap up, I did want to note that we have colleagues and clients who've been impacted at the end of last year, the floods in North Carolina and now the fires in Los Angeles.

And I want to express our sympathies to them and everyone impacted by those tragedies we continue to do all we can to help mitigate some of the damage there.

Thank you to our colleagues for their hard work and contribution to Webster's success in 2024, as they delivered again, fantastic outcomes for our clients and communities.

Thank you all for joining the call today.

Operator, we'll open it up for questions.

(Operator Instructions) Mark Fitzgibbon, Piper Sandler.

John, it sounds like the Treasury Secretary nominee is disposed to easing regulations on banks like Webster.

I guess if -- I'm curious if the Category 4 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?

Yeah.

I mean, Mark, I think it stands right now, we're obviously really excited about our kind of path forward from an organic perspective.

And you are right that the Category 4 kind of bright line hurdle at $100 billion really takes some of the optionality to be acquisitive out of the equation right now.

Our expectation is that it will take some time to really get a good sense of 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 4 has lessened over time, 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 our 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 quickly things will change over the course of the next year.

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?

It was three or four credits.

It wasn't -- there was some office in there as well as usual.

What we're seeing from an overall credit perspective, and obviously, we had 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 risk rating migration across the loan portfolio, but that mitigated and moderated materially in the fourth quarter.

So it's three or four credits.

And I would say kind of the same usual suspects in terms of the characteristics of those credits.

Jared Shaw, Barclays.

Just looking at the margin trajectory, how should we be thinking about that, I guess, maybe with the backdrop of that securities repositioning and when that was in the quarter?

Yeah.

So we talked about last quarter expecting 2025 to be in that 3.30% range.

With positive movements in Q4 and steeper curve, we now believe that our 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 with about $18 million increase in value to our NII in 2025.

Okay.

All right.

That's great color.

And then I guess just circling back on sort of capital from a different angle.

You have that 11% near-term target, 10.5% longer-term target.

What would have to happen for you to feel comfortable, I guess, with bring that even maybe down to 10% or so?

And should we expect you to be looking at buybacks maybe a little more aggressively here?

Yeah.

I mean 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 robust CET1 ratio right now.

And we hope for more loan growth.

I think we're in line with most of the people that have reported so far and still anticipating kind of mid-single-digit loan growth.

If we get a bump in economic activity and loan demand, we'll 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.

Matthew Breese, Stephens.

Neal, I was hoping within kind of the margin guide for the year, you could just discuss expectations around deposit costs and betas and maybe some insight as to where deposit costs sit here in mid-January?

Yeah.

So Q4, we had deposit costs at 2.2%.

As we went into December, we had moved down about 7 basis points to 2.13%.

In Q1, we expect that to continue to decline.

And we do expect a very strong margin in Q1 with what we're seeing right now.

That will tail off a little bit throughout year on the margin side as we add some additional debt and we have a few things happen 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, I have seen some great moves on the commercial side.

We have a playbook where we run every quarter -- excuse me, after every cut, we take action.

We move down multiple consumer portfolios.

We have a good CD renewal strategy.

Kind of cycle to date, we have a beta of approximately 30 basis points on our entire deposit portfolio.

And we are anticipating maintaining that at about a 30% level that is what is in our guidance as our terminal beta for this cycle.

And as I mentioned before, we expect two cuts, so kind of through 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.

Yeah.

Very helpful.

And then my second one is more strategic.

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.

How happy are you with the current footprint?

And might we see you kind of embark on any sort of geography expansion near or medium term?

If so, where?

Yeah, that's an interesting question.

I don't think we have any specific plans to sort of take our local businesses outside of our kind of branch footprint, Philadelphia to Boston, which is where we do most of our local commercial real estate, middle market business banking, that kind of activity.

I think we found over time, it's 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 LPOs and so forth is, as you 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 businesses kind of national, public sector finance, ABL, equipment finance are generally national in business.

We understand the geographies.

We understand the businesses.

So I think you 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 footprint, I think you'd probably see us just continue to invest in our national businesses as our kind of pipeline for geographic expansion.

Timur Brazier, Wells Fargo.

My first one, I just wanted to circle back on margin.

The fourth quarter results, you're kind of near the top end of the range that you already laid out.

You mentioned that first quarter is going to be pretty strong again. are we implying that the rest of the year, there's going to be enough pressure to kind of get it back within the range?

Or could that range prove to be conservative here?

Yeah.

I think we're pretty confident with that 3.35% to 3.40% range.

There's 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 and some seasonal deposits.

So we see a lot of benefit in the beginning of the year.

I think our big question that we have going into the year that kind of gets you to the bottom end of our guide and the top end of our guide is 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.

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, it's a positive impact, slightly positive, but it will have a kind of a 3 to 5 basis point drag on NIM as we take cash up in the second half of the year also.

So kind of wrapping that up, confident in our 3.35% to 3.40% NIM for the year.

Okay.

Great.

And then I just wanted to dig in a little bit on credit inflection and how we should think about quantifying that?

Does that imply that 25 basis points to 30 basis points that John, you called out as being a normalized level?

Is it a step function towards that level kind of off of this current base?

And I'm just wondering what your thoughts are around the yield curve.

And if rates stay where they are, continue to move higher what kind of tail risk that might attribute to some of your CRE properties?

Yeah, it's a great question.

Obviously, a relatively difficult one to answer with respect to credit cost and provisioning.

But if you look at the first three quarters of '24, we were in that 25 basis point 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 time.

And so I think while obviously, the provision itself is also reliant on the Moody's forward outlook of economics.

What type of credit quality we're onboarding in new originations, the pace of loan growth and so forth.

But if you peg it to kind of the charge-off level, I think our expectation is that we'll be somewhere around that 25 basis points to 30 basis points in each of these next quarters and for the full year in '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 it is the number three quarters of '24 is more of a proxy for what we expect to happen during the course of '25.

So if you were pegging that, I think, in our base case models, we're back to the way you envisioned our performance in the first three quarters.

Underneath that, right, in terms of risk migration, 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 in the direction of more neutral in terms of seeing upgrades and downgrades.

We didn't have a big bump in criticized loans in C&I.

We think we've gotten our arms around the 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 in that office portfolio have actually improved.

So what we have left, we feel better about than we did a year ago in terms of what was remaining.

So I think there are reasons when we look at our pipeline, and I talked to Jason about this all the time.

Obviously, we still think kind of mid-25 as 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, you should see provision levels kind of go back to where they were in the first three quarters and hopefully lower over time if we get better economic data and an acceleration of improvement in the portfolio.

The good news for us is we're very profitable.

We have been even in a high charge-off quarter in the fourth quarter, we had really terrific return profile and good profitability.

Chris McGratty, KBW.

John if you look at the guide -- the loan growth guide 4% to 5% last year, I think it was 5% to 7% and that -- the macro kind of worked against you.

What was interesting to me is you saw the sponsored book grow in the quarter.

And I think that has been a variable for the last year.

So can you just give a comment or two on trends in that portfolio?

Yeah, so -- and 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, that 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's an active M&A environment.

So if you ask 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 you see in our overall loan growth numbers, I think, still a relatively balanced and conservative view.

And interestingly, we only had 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 3% to 6%, 4% to 5%, whatever that range is.

And I think it's because there's obviously the Trump bump exuberance that came right after the election.

But I think when you look through it, you talk to customers, you look at pipeline, there's a decidedly positive bias and 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 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 '25 in the sponsor book than I was a year ago.

Okay.

Great.

I appreciate that.

And then in terms of just -- I missed it.

I just jumped on a minute late.

The capital commentary, Neal, [the 10, 11, going to 10.5] again, forgive me, could you remind me kind of where the buyback stack ranks in terms of priorities?

And then I guess, what does it take to get to

[10.5]?

What would you need to?

Yes.

And we just talked about this.

So I think you're right.

We are in a very strong capital position, right.

We're well in excess of our short-term target of 11%.

I think that we are more likely than not to be in a position to return capital to shareholders during '25.

The elements in that are, 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 Ametros or HSA.

That would be a priority use of capital for us.

As we see credit continue to moderate, we'll be more confident.

And depending on market conditions, if we do not see loan growth outside of what our current view is on loan growth, then we would be likely to engage in share purchases materially during the course of 2025.

Given your capital iteration, you could do both, right?

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 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 as '25 progresses, we will be then comfortable to move that capital target ratio down to our long-term 10.5% target.

Laurie Hunsicker, Seaport.

If we can just go back to charge-offs, can you share with us on the charge-off amount, the $61 million or so of commercial net charge-offs, how much of that was office versus how much of that was actually in the healthcare services?

And then also just a little bit of comment in terms of -- you had a pretty sharp drop in office linked quarter, which was great, $917 million down to $824 million.

How much of that obviously was charge-offs sale?

Or what exactly is happening?

Sure.

So I would say that it's a relative office -- office-related charge-offs were around $15 million, and the healthcare charges were around $20 million, to give you a sense in that $60 million of the $60 million in charge-offs.

The others were smaller contributions, one-offs, fraud, different things that were management and kind of idiosyncratic if you will.

Your question on office, we did not have any charges related to loan sales in the quarter.

So that was sort of a natural reduction.

I gave you the charge-off numbers.

So the rest of it is good.

It's payoffs and pay downs over time.

And we definitely saw more activity, which I think portends to support some of our discussions around moderating credit migration and activity.

So we are seeing -- we saw a good amount of commercial real estate and C&I payoffs in the quarter.

And so that was -- there were more natural remediation, if you will, a natural reduction in the portfolio this quarter, which is good.

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 securities restructured?

Yes.

The spot margin for December was very strong, as I mentioned earlier, and we were actually at 3.45% for December.

And the securities reposition happened kind of middle of the quarter where we saw $1.8 million of positive benefit in the quarter due to the securities reposition.

Anthony Elian, JPMorgan.

Your NII guidance assumes two cuts beginning in March.

But if we don't get cuts until the second half of this year, could you talk about the impact to the NII guide range you provided?

Yeah.

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, you're kind of in a plus or minus $10 million range.

So it all fits within our guidance.

It isn't a material drive -- I mean those are material numbers, but not a material driver in or outside of our range.

We're a little bit more sensitive to longer-term rates where we could see a little bit more benefit if long-term yields pick up, but still positioned fairly neutral there.

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 and portfolios you expect to drive loan growth this year?

Sure.

I would say, number one, it's more seasonal than kind of back end 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.

I think when you look at our portfolio, we're assuming growth across categories.

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 [250] target.

We are seeing more payoffs there.

So we are in the commercial real estate business, and we have capacity to replace what's rolling off.

And 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.

Nick Holowko, UBS.

Maybe just to start coming back to the expense outlook and thinking about the investment spend related to the regulatory front, if it did become clear that there were going to be more meaningful changes in the regulatory backdrop, how would that change how you're thinking about the $40 million to $60 million in incremental run rate expenses?

Yeah.

It's a great question.

And I think what I'd say, and then I'll turn it over to Neal to actually answer the hard part of the question.

One of the things we're doing as we build out our road map here, if we are taking into consideration the fact that there may be changes the elimination of some requirements.

And so what we're doing is all the investments we're making in '25 are 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 the risk side, on a technology side, on a data side.

And what we're back ending in our prioritization and our Gantt chart are those that may not be required or could change with respect to the dynamics or the extent to which we need to invest.

So I think for us, many of these investments that are there, we're making regardless of what the Category 4 requirements are.

And then we're trying to back end and kind of deprioritize in our three-year journey, those investments that we may be able to pull back because they're either more check the box or perfunctory or we don't think they add significant value to the strength of our franchise.

So I don't know whether Neal will be able to give you kind of dollars there.

It's very difficult, like things like TLAC are obvious, right?

If you don't have to issue TLAC that's a savings.

But the other stuff is sort of nuanced, and I don't know whether we'd be prepared to tell you what savings we would have based on what regulatory changes are there.

Yeah.

I don't think we have 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.

Perfect.

And then maybe coming back to another strategy-related question.

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?

Right.

Great question.

We anticipate the partnership to be alive and active in 2Q.

That's our best guess.

We're still bullish.

I will tell you that there is no economic advantage 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 we are still excited about it, but it doesn't drive any meaningful economics in our guidance.

So it's potential upside.

Bernard Von Gizycki, Deutsche Bank.

Just on expenses.

Appreciate the color on the $15 million to $20 million of large bank costs incorporated in the '25 guide.

Could you just provide any additional color on the contributions of expense growth?

John, you noted the focus on the initiatives growing Ametros.

Maybe how much growth is related there or what other incremental investments you're making?

Just any color you can provide on the contributions.

Yeah.

I'll take -- provide 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 that such as Ametros that we have strong growth expectations.

We talked about our Category 4.

We're also investing -- continuing to invest in our technology infrastructure.

And you also asked 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 4, continuing to support our business lines and our client experience, and then really continuing to invest in our technology and infrastructure to prepare for future growth.

Okay.

Great.

And then just on the deposits.

I know there were some contributions from the 1031 exchange relationships you noted.

Was that more seasonal, like more [forward] to you?

What are expectations for growing that maybe in '25?

And then just some commentary on the digital channels.

It seems you're leaning in there.

Just any thoughts on growth and how the cost of those deposits from that platform kind of play out?

Yeah.

On the 1031 side, 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 where there's more buys and sells and more transaction activity, you're going to see naturally some -- we have good relationships there, and you're going to start seeing properties exchanging and so forth.

So 1031 business should be -- should grow in 2025 relative to where it was today.

On the digital channel side, we had good solid growth this year.

And I'd really say that across the board, when you 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 offering is good.

The pricing and service proposition is working really well.

We're pretty excited about what we can do in those diversified deposit verticals across each and every one of them.

Ben Gerlinger, Citigroup.

Those expenses are the [wall of worry] for you guys.

It seems like the guidance here is pretty reasonable, so a better upside on revenue.

I know you gave the guidance of $15 million to $20 million for incremental just preparation [can be a step] forward.

I said rules don't change, i.e., the steady state, is it fair to kind of think that's like [17.5] incremental is '26 and '27 as well on a three-year outlook?

Or is it kind of frontloaded?

I'm just trying to do sound like assuming rules don't change in this sense.

You're breaking up a little bit, but I think I got your question.

And so our assumption of the $40 million to $60 million is based on rules as they stand today.

We are looking -- when we talked about $15 million to $20 million in 2025.

As you play that out, obviously, we'll analyze things again at the end of next year and as we go through.

But I see it more as a stair step build than big fluctuations in either direction.

So I think you could kind of count on a current plan of being more in line stair step versus having any unusual fluctuations.

And hopefully, I answered your question correctly there based on what I heard.

That was kind of the point that I know if one year could be a little bit less than the other, but it makes a lot of sense.

And then with that, do you think there's any synergies?

Or is that kind of that $40 million to $60 million a net number?

Like if you at least spend $10 million on investments, you could save $5 million somewhere else.

You're counting that $10 million or would it be the net number that we should be -- this $40 million to $60 million is net of all the above?

Yeah.

I would say it's a net number.

And you asked, I think, about synergies also in there's some, John mentioned, you could put these expenses in different buckets.

Some of them may be a check the box needed for a regulatory compliance item.

But we do believe, as John mentioned, many of these expenditures will make us a more efficient and effective organization.

As we go deeper on some capital areas, we'll have opportunities to optimize our capital stack.

As we continue to invest in the liquidity side, we'll be able to optimize and even increase our liquidity level from today.

As we invest in the technology infrastructure data, we should get more operating efficiencies going forward.

So I do look at these as 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 4 bank.

Daniel Tamayo, Raymond James.

Most of my questions have been asked and answered.

But maybe just a couple of specific ones.

First, you talked about the 30% deposit beta assumption for the rate cut cycle.

And I think you've talked about kind of what you're thinking in terms of maybe the non-interest-bearing not getting back to where it was pre cycle.

Correct me if I'm wrong on that.

But just curious on kind of what's underlying that assumption given the beta was higher, about 40% on the way up?

And maybe what could improve that projection from the 30%?

Yeah.

Very, very fair question.

We were above 40% on the way up.

As I mentioned, our guidance has 30% in 2025 on the way down.

We look at a 4% neutral environment very differently than the 0% environment that we came out of.

And I think that the big question mark we have out there is exactly what you hit where do DDA balances land?

As I mentioned, our guide has modest growth in DDA balances compared to the decline that we had last year.

If that accelerates, I believe we can beat that deposit, that beta.

But I think we have a reasonable assumption and a reasonable beta in for our baseline guidance here.

Okay.

I appreciate that.

And then as we think kind of longer term around the margin, you talked about the new forecast 3.35% to 3.40% this year.

You're making changes to the balance sheet as you get larger, you talked about adding debt.

I mean is that reasonable kind of assumption for a normalized margin you think for you guys at this point as you look to the future?

Obviously, there's a lot of things that can change.

But given kind of a normal yield curve and where you envision the balance sheet ending by the end of the year, does that seem like a reasonable place for the margin to kind of stabilize?

Yeah.

Clearly, a lot of variables out there that can move things around.

But as we mentioned, we we've done all we can to position as neutrally as possible.

And we do believe your statement is correct that, that is a good kind of midterm margin level to think about our organization having.

John Arfstrom, RBC Capital Markets.

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 you're seeing happening and maybe your confidence that the worst is over there?

Yeah, I mean, I guess what we're seeing -- I mentioned earlier, we're definitely seeing more natural resolution to credits.

We're seeing restructuring and amendments to deals where borrowers feel like they've got equity still in the building, so they're willing to rightsize the loan.

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 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 over time, but they've also come down because of some of these refinancings, restructures and refinancing.

So we've seen an absolute change kind of in some behaviors.

And that's 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 that the existing portfolio we have there now is stronger than the portfolio we had, say, at the beginning of last year.

Okay.

Good.

That's helpful.

Follow-up on Mark's question, the first one.

Is there anything else other than Category 4 from a regulatory point of view that's on your wish list for the new administration or regulatory leadership?

Yeah.

We only have a few minutes left, so I can't actually go off on a nice diatribe there.

But I guess what I would say probably consistent with what a lot of CEOs would tell you is I love to see a return to more tailored supervision.

And I think that probably captures everything, which is look at organizations, not based on artificial cutoffs of asset size or other things like that and come with a philosophy that you supervise banks commensurate with the risk profile and the activities they engage in.

So I think that we're at $80 billion now.

I don't think that if we're at $105 billion and we keep our same activity base in our same line of businesses and our same infrastructure that all of a sudden, we create more systemic risk to the system or that we're any riskier.

So maybe some lifting of artificial asset size thresholds would be terrific.

That may be a bridge too far.

But overall, just more tailored supervisory paradigm.

And I think we'll get some of that, but I think it will take some time.

And that concludes our question-and-answer session.

I will now turn the call back over to CEO, John Ciulla, for closing remarks.

Thank you very much, everyone, for joining us today.

I hope you have a great day.

Thanks.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.