Webster Financial Corp Q4 FY2024 Earnings Call

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. The 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'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 Ametros' client base, increasing the 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 towards 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 for balanced loan growth into the future. Our full year financial results continue to be among the best of our life-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 had some unique noninterest 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 continues 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 health care 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-offs totaled just over $60 million, with 60% of those charges coming from traditional office related or health care services credits, the two portfolios we have been talking about over the past year. We still believe a normalized annualized charge-off rate is 25 to 30 basis points with some volatility quarter-to-quarter given the commercial value 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 loss. 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 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 $60 million increase in noninterest income. Net interest income benefited from a modest expansion in NIM and growth in interest-earning assets. Noninterest income was up $16 million over the prior quarter as we realized the 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. The 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 and nominal impact to capital ratios. We anticipate an 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 noninterest income. Adjusted noninterest income was $109 million, up $16 million over the prior quarter. Excluding the direct investment gain and the positive CVA in the quarter, noninterest income would have been roughly $95 million. Underlying business activity remained consistent to the prior quarter. Turning to Slide 14. We have details on noninterest 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 health care 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 will let the bank become 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. 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.

Your first question comes from the line of Mark Fitzgibbon from Piper Sandler. Your line is open.

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

Yes. 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 3 or 4 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 nonaccruals 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 3 or 4 credits. And I would say kind of the same usual suspects in terms of the characteristics of those credits.

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

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?

Yes. So, we talked about last quarter expecting 2025 to be in that 3.30% range. With positive movements in Q4 and a 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.

That's great information. I want to revisit the capital targets. You have an 11% target for the near term and a 10.5% target for the long term. What changes would need to occur for you to consider lowering that target to around 10%? Should we anticipate a more aggressive approach to buybacks from you?

Yes. 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 health care 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.

Your next question comes from the line of Matthew Breese from Stephens. Your line is open.

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?

In Q4, our deposit costs were at 2.2%. By December, we had reduced that to 2.13%. We expect this trend of decline to continue into Q1, where we anticipate a strong margin based on current indicators. While we foresee some decrease in margins throughout the year as we add more debt and encounter various developments, we remain optimistic about a robust Q1. On the topic of deposit repricing, we have made significant progress and particularly excelled in the commercial sector. We follow a systematic approach and take action after every reduction, adjusting multiple consumer portfolios accordingly. Our strategy for CD renewals is effective, and currently, our overall deposit portfolio has a beta of around 30 basis points. We plan to maintain this at a 30% level as part of our guidance for this cycle. With expectations of two interest rate cuts ahead, we project a consistent 30% beta during this period. I hope this clarifies our perspective on deposit cost pricing.

Yes. 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 in the near or medium term? If so, where?

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

Your next question comes from the line of Timur Brazier from Wells Fargo. Your line is open.

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?

Yes. 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.

I would like to explore the credit inflection and how we can quantify it. Does this suggest that the 25 to 30 basis points John mentioned as a normalized level is attainable? Is there a step towards that level based on our current position? Additionally, I am curious about your views on the yield curve and how the current or potentially rising rates may pose any tail risk to some of your commercial real estate properties.

Yes, that's a great question. It's a bit tricky to address regarding credit costs and provisioning. In the first three quarters of '24, charge-offs were in the 25 to 30 basis point range, which we consider our base case assumption for '25, with hopes to exceed that over time. The provision depends on the Moody's economic outlook, the credit quality of new originations, and loan growth pace. If we align it with the charge-off level, we expect to see around 25 to 30 basis points in the upcoming quarters and for the entire year of '25, while noting that our large commercial banking portfolio can lead to variability in any quarter. The first three quarters of '24 serve as a good proxy for what we anticipate in '25. In terms of risk migration, we observed some positive signs in the fourth quarter regarding risk ratings. Specifically, on the C&I side, we noted a trend towards more neutrality with upgrades and downgrades, and there wasn’t a significant increase in criticized loans. We're quite confident in the portfolios I mentioned, and the credit metrics for classified and nonaccruals in the office portfolio have actually improved. What remains looks more favorable than it did a year ago. We see potential for balanced upgrades and downgrades by mid-‘25, which should positively influence provisioning. If we remain within the expected charge-off range, provision levels could return to earlier figures, and potentially decrease further with improved economic data and portfolio advancements. Notably, even during a quarter with high charge-offs, we achieved strong profitability and a solid return profile in the fourth quarter.

Your next question comes from the line of Chris McGratty from KBW. Your line is open.

John, if you look at the loan growth guidance, which was 4% to 5% last year, compared to 5% to 7% previously, the macroeconomic factors have affected us. What stands out to me is that the sponsored book grew during the quarter, and that has been a variable over the past year. Could you share a couple of comments on the trends in that portfolio?

Yes. I am hesitant to make predictions, Chris. However, I can say that our pipeline is stronger, and we are seeing more activity. Increased activity is significant for us because it means not only more origination but also more payoffs, as sponsors tend to sell their platform companies during a vibrant M&A environment. If you ask me again, I feel more optimistic about the momentum in that business as we approach 2025, thanks to increased economic activity, a better M&A environment, and a larger pipeline. Looking at our overall loan growth numbers, we maintain a relatively balanced and conservative outlook. Interestingly, we have only seen a few banks report before us, but it's noteworthy that most are projecting growth in the range of 3% to 6% or 4% to 5%. This trend appears to stem from the initial boost following the election. After engaging with customers and reviewing our pipeline, I observe a positive bias and optimism moving forward, though it's still cautious. It seems that many believe it will take time to see how various dynamics, such as tariffs and interest rates, influence investments. Therefore, we think the most reasonable expectation is mid-single-digit growth. Nonetheless, I am more encouraged by what we’re observing in the sponsor book as we move into 2025 compared to a year ago.

Your next question comes from the line of Timur Brazier from Wells Fargo. Your line is open.

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?

Yes. 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.

Your next question comes from the line of Chris McGratty from KBW. Your line is open.

John, if you consider the loan growth guide of 4% to 5% last year, it was 5% to 7% previously, and the macroenvironment seems to have impacted that. One noteworthy point is the growth in the sponsored book during the quarter, which has been a variable for the past year. Could you share your thoughts on the trends in that portfolio?

Yes. I’m hesitant to make predictions, Chris, but I can say that our pipeline is stronger, and we are seeing increased activity. More activity is beneficial for us as it not only leads to more origination but also more payoffs, particularly as sponsors are selling their portfolio companies in a more active M&A environment. If you ask me again, I feel optimistic about the momentum we have in that business as we approach 2025 due to increased economic activity, a favorable M&A environment, and a larger pipeline. However, our overall loan growth numbers suggest a relatively balanced and cautious outlook. It's been interesting to observe the recent reports from other banks showing a range of growth expectations from 3% to 6%, likely influenced by the enthusiasm following the election. Nonetheless, when speaking with customers and evaluating our pipeline, there is a noticeable positive outlook moving forward, although it remains cautious. It seems that people are being careful in determining how the ongoing dynamics, such as tariffs and interest rates, will play out before making aggressive investments. Therefore, we believe that mid-single-digit growth is the most reasonable expectation. However, I am more encouraged by what we are seeing in our sponsor book as we head into 2025 compared to a year ago.

Your next question comes from the line of Nick Holowko from UBS. Your line is open.

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?

Yes. 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 that eliminate 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 the 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 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.

Yes. 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?

We expect the partnership to be operational in the second quarter. That's our best estimate. We remain optimistic. However, I want to clarify that it doesn’t contribute any economic advantage or added value to our current projections. Once we are fully operational, we will gain better insights into how it affects our loan growth, loan balances, and investment income, although this will be delayed until we launch. We're still enthusiastic about it, but it doesn't have a significant impact on our financial guidance—it represents potential upside.

Your next question comes from the line of Bernard Von Gizycki from Deutsche Bank. Your line is open.

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.

Yes, I can provide some comments. We have around $30 million in year-over-year investments that are supporting our business lines, particularly in areas like Ametros where we have strong growth expectations. We discussed our Category 4 initiatives, and we are also continuing to invest in our technology infrastructure. Additionally, you inquired about expenses such as annual merit, benefits, and payroll taxes. I would highlight that our three primary areas of investment focus are preparing for Category 4, supporting our business lines and enhancing client experience, and further investing in technology and infrastructure to set the stage for future growth.

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

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 noninterest-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%?

Yes. 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 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 a 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?

Yes. Clearly, a lot of variables out there that can move things around. But as we mentioned, we've done all we can to position as neutrally as possible. And we do believe your statement is correct that, that is a good kind of midterm margin level to think about our organization having.

Your next question comes from line of John Arfstrom from RBC Capital Markets. Your line is open.

Can you elaborate on the green shoots in the office space and discuss any signs of stabilization? What examples can you provide of what you are observing, and how confident are you that the worst is behind us?

Yes, we're definitely observing more natural resolutions to credits. There are instances of borrowers refinancing away from us, as well as restructuring and amendments to deals where they feel they still have equity in the building, making them willing to adjust the loan amounts. This borrower behavior, along with refinancings and restructures, provides us with a solid indication of the market. Additionally, if we examine the levels of classified, criticized, and nonaccrual loans in the office portfolio, they have decreased. This decline has occurred partly due to charge-offs over time and also as a result of these refinancings and restructures. We've noted a significant change in behaviors. While we still face elevated levels of classified and nonaccruals in the office portfolio and continue to work through those challenges, we believe we have turned a corner. The current portfolio is stronger than what we had at the start 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?

Yes. 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.