Webster Financial Corporation

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 emlyn harman to introduce the call mr harman 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 reformat 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 accompanying 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 ask just one question and one follow-up before returning to the queue. I'll now turn the call over to Webster Financial CEO, John Ciulo.

Thanks, Emlyn. 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, Neil 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 the 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 Amitros 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 Amitros' client base, increasing industry adoption of settlement administration, and exploring alternate markets for Amitros' 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%. 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 1.27%, and an efficiency ratio just below 45%. Loans and deposits continued to grow, our net interest margin expanded, and we had some unique non-interest income opportunities in the quarter. On slide four, 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 Amitros, 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 five, we continue to provide metrics on the CREE 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 are looking at a mid-2025 inflection point on overall credit metrics. In the quarter, net charge-off totaled just over $60 million, with 60% of those charges coming from traditional office-related or healthcare 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 basis 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.

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 ETFs of $1.43 cents. Adjustments consisted of a pre-tax $57 million securities repositioning charge and a $29 million deferred tax assets 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% in the 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 a 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 effect of the 100 basis points of Fed cuts 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 quarters. driven by balance sheet growth and a modest increase in the net interest margin. The NEM was up three 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 yield and nominal impact to capital ratios. We anticipated an earn-back on the transaction of three years. We reduced our total deposit costs by 16 basis points 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 is non-interest income. Adjusted non-interest income was $109 million, up $16 million over the prior quarter. Excluding a direct investment gain and the positive CBA 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 detail 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 had 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 allowances percentage of loans remained effectively flat the 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-grade migration slowed in the quarter, with non-performing assets up 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 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 two 25-basis-point Fed funds reductions beginning in March. We expect non-interest income will be $370 to $390 million. We anticipate expenses will be in a range of $1.39 billion to $1.41 billion, with an efficiency ratio between 45% and 47%. Incorporated in our expense outlook are approximately $15 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 and reporting, frontline controls, and treasury management. Over the next several years, we believe we will add between $40 to $60 million in run rate operating expenses, inclusive of the amount realized in 2025, that will 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, Neil. As Neil 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 Amitros' addressable market. Also contemplated in our outlook are 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 at 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 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.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of Mark Fitzgibbon from Piper Sandler. Your line is open.

Hey, guys. Good morning.

Hey, Mark.

John, it sounds like the Treasury Secretary nominee is disposed to easing regulations on banks like Webster. I guess I'm curious if the category four 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, you know, 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 four kind of bright line hurdle at $100 billion is really take some of the optionality to be acquisitive out of the equation right now. You know, 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 four is 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, you know, 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 CNI 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, you know, office in there as well, as usual, you know, what we're seeing from an overall credit perspective, and obviously, we had a slightly higher charge off this quarter is kind of non-accruals and loss really resulting in the two portfolios I mentioned. You know, 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, you know, I would say kind of the same usual suspects in terms of the characteristics of those credits.

Thank you.

Thank you, Mark.

Our next question comes from the line of Jared Shaw from Barclays. Your line is open.

Hey, good morning. Good morning, Jared. You know, 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 330 range. With positive movements in Q4 and a steeper curve, we now believe that NEM for 2025 will be in the range of 335 to 340, 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, Keller. Thanks. And then I guess just circling back on sort of capital from a different angle, you know, 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 bringing that even maybe, you know, 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. You know, 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 digits 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. Thanks a lot.

Your next question comes from a line of Matthew Brees from Stevens. Your line is open.

Hey, good morning, everybody. Neil, I was hoping, Neil, 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, you know, 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 seven 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 the 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 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. Yep.

Very helpful. Thank you. And then my second one is more strategic. You know, 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?

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

Great. I'll step back. Thanks for taking my questions.

Thanks, Matt. Your next question comes from a line of Timur Brazir from Wells Fargo. Your line is open.

Hi, good morning. Thanks for the question. 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 335 to 340 range. You know, 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 a 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 questions 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. 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 three to five basis point drag on them as we take cash up in the second half of the year also. So kind of wrapping that up, confident in our 335 to 340 NIM for the year. OK, 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 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 I might introduce to some of your CRE properties?

Yeah, it's a great, a great question. Obviously a relatively difficult, difficult one to answer with respect to credit costs and provisioning. But if you look at the first three quarters of 24, we were in that 25 to 30 basis point range in terms of charge offs. You know, 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 if, you know, while, Obviously, the provision itself is also reliant on, you know, 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, you know, 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 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 the way I look at it is that the first 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 CNI side, for example, we moved closer, you know, in the direction of more neutral in terms of seeing upgrades and downgrades. We didn't have a big bump in criticized loans in CNI. You know, 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, you know, I think there are reasons when we look at our pipeline, and I talk to Jason about this all the time, obviously, you know, we still think kind of mid-25 as getting sort of a more balance 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 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. And even in a high charge off quarter in the fourth quarter, we had really terrific return profile and good profitability.

Great.

Your next question comes from a line of Chris McGrady from KBW. Your line is open.

Oh, great. Good morning. Good morning, Chris. Hey, John, if you look at the guide, the loan growth guide four to five last year, I think it was five to seven. 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 was been a that was been a variable for the last year or so. Can you just give a comment or two on trends in that portfolio?

Yes. So and I am. I am snakebitten to go out on a limb on these things, Chris. 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. 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 know, 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, you know, whether it's three to six, four to five, whatever that range is. And I think it's because, you know, 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'll 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. Appreciate that. And then in terms of just, I missed it. I just jumped on a minute late. The capital commentary, Neil, the 11 going to 10 and a half. Again, forgive me. Could you remind me kind of where the buyback stack ranks in terms of priorities? And then I guess what it would take to get to 10 and a half? What would you need to see?

Yeah, yes. And we just talked about this. So I think you're, 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 Amitros 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 generation, 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.

Great. Thanks. Sorry for the repetitive question.

No, not at all.

Thank you. Your next question comes from a line of Lori Hunziker from Seaport. Your line is open.

Yeah. Hi. Thanks. Good morning. Lori, good morning. I wondered if 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 comments in terms of, you know, you had a pretty sharp drop in office link quarter, which was great, $917 million down to $824 million. Um, you know, how much of that obviously was charge off sale or, or what exactly is happening? Thanks.

Uh, sure. So I would say that it's a relative office. Office related charge off for around 15 million and, uh, the healthcare charges were around 20 million, uh, to give you a sense in that $60 million of the $60 million in charge off the others. were smaller contributions, one-offs, you know, 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 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 CNI payoffs in the quarter. And so there were more natural remediation, if you will, and natural reduction in the portfolio this quarter, which is good.

Right. 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 securities restructure? Thanks.

Yeah, 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.

Right. Thank you.

Thank you.

Your next question comes from the line of Anthony Alien from JP Morgan. Your line is open.

Hi, good morning. 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 and 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 can see a little bit more benefit if long-term yields pick up, but still positioned fairly neutral there.

Thank you. 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? Thank you.

Sure. I would say number one, it's more seasonal than kind of back-ended. So 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.

Thank you.

Thank you, Anthony.

Your next question comes from a line of Nick Holoco from UBS. Your line is open.

Hi, thanks for taking my question. Maybe just to start. Good morning. Maybe just to start coming back to the expense outlook and thinking about the investment span 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 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 Neil to actually answer the hard part of the question. 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 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 a 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 uh with respect to to the dynamics or the extent to which we need to invest so um i think you know for us many of these investments that are there we're making regardless of what the categories of poor 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'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 Neil will be able to give you kind of dollars there. It's very difficult. 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 it any better than what John said, so I don't have much else to add.

Perfect. Thank you. 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? Thank you.

Right, great, great question. Are 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.

Perfect. Thank you very much.

Thank you. Your next question comes from the line of Bernard Von Giske from Deutsche Bank. Your line is open.

Hey, guys. Morning. Just on expenses, Appreciate the color on the 15 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 Amitros. 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 a provide some comments there. So we have, I would say, around 30 million dollars year over year, really supporting the business lines with some good, healthy investments in areas that such as the metros that we have strong growth expectations. We talked about our category for, you know, 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 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 was some contributions from the 1031 exchange relationships you noted. Was that more seasonal, like more 4Q? 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 on that platform kind of play out?

yeah on the 1031 side that was it was back ended in 2024 and activity there is going to be driven by whatever happens broadly in you know commercial real estate activity so we get back to a place uh where there's more you know buys and sells and more transaction activity you're going to see naturally some you know we have good relationships there and you're going to start seeing uh you know properties exchanging and so forth so you know 1031 business should be you know should grow in 2025 relative to where it was today TAB, Mark McIntyre, On the digital channel side we had good solid growth, this year, and I really say that across the board we set aside consumer and commercial. TAB, Mark McIntyre, And you just look at what we did on the digital on the healthcare and broadly on the healthcare side. TAB, Mark McIntyre, 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 and all those business lines to ensure that we stay competitive the product offering is good. The pricing and service proposition is working really well, and we're pretty excited about what we can do in those diversified deposit verticals across each and every one of them.

Okay, great. Thanks for taking my questions.

Thank you. Your next question comes from a line of Ben Gerlinger from Citigroup. Your line is open.

Thanks, Maury. um do you guys have those expenses are the wall of worry for you guys um it seems like the guidance here is pretty reasonable especially a better upside in revenue i know you gave the guidance of 15 to 20 for incremental because just preparation to get cat for work i said the rules don't change i.e the steady state Is it fair to kind of think that like 17 and a half incremental is 26 and 27 as well on the three year outlook? Or is it kind of front loaded? Just kind of give some 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 to $60 million is based on rules as they stand today. We are looking, you know, we talked about 15 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.

Yeah, I'm sorry about that. I gotcha. That was kind of 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. And then with that, do you think there's any synergies or that kind of that 40 to 60, a net number? Like if you spent, if you spend 10 million on investments, you could save 5 million somewhere else. You're counting that 10 or is it, would it be the net number that we should be, that's 40, 60 is net of all the above?

Yeah, I would say it's a net number. And you asked, I think, about synergies also. And, you know, 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. You know, 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 levels 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.

Okay, that's helpful. Thank you. Thank you.

Your next question comes from the line of Daniel Tamayo from Raymond James. Your line is open.

Thanks. Good morning, guys. Most of my questions have been asked and answered, but maybe just a couple specific ones. First, you talked about the 30% deposit beta assumption for the rate cut cycle, and I think you've talked about 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, you know, above 40% on the way up, and maybe what could improve that projection from the 30%.

Yeah, 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, you know, 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 is, 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, you know, as we think kind of longer term around the margin, you talked about the new forecast, 335 to 340 this year. you're making changes to the balance sheet as you get larger. You talked about adding debt. I mean, is that a reasonable kind of assumption for a normalized margin, do 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. Thanks.

Yeah, 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 that is a good kind of midterm margin level to think about our organization having.

Okay, terrific. That's all I had. Thanks a lot.

Thank you very much. Your next question comes from the line of John Arkstrom from RBC Capital Markets. Your line is open.

Thanks. Good morning. Good morning, John. Hey, good morning. 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 people refinancing away from us. 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 right-size 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, you know, 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, you know, 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 four 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, you know, I guess what I would say, probably consistent with what a lot of CEOs would tell you, is I'd love to see a return to more tailored supervision. And I think that probably captures everything, which is, you know, 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, you know, 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 and our same line of businesses and our same infrastructure that all of a sudden we create, you know, 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'll take some time.

OK. Thank you very much. Appreciate it. Thank you.

And that concludes our question and answer session. I will now turn the call back over to CEO John Shula 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.