Terence McEvoy

Terence McEvoy asked if any new segments in Commercial Real Estate (CRE) or Commercial & Industrial (C&I) were showing signs of stress, and also inquired about recent trends observed among lower-balance deposit customers.

Answer

Executive James Eccher responded that while the bank is largely through its office and healthcare challenges, some minor stress is appearing in the C&I portfolio, noting two specific downgrades that have been proactively reserved for. Executive Bradley Adams added that a slowdown in card transactions and a decline in average balances for lower-end customers is a trend that began over a year ago, and the key indicator to watch is whether that stress moves up the income ladder.

Terence McEvoy inquired about the outlook for 2025 expenses, specifically asking for details on technology and digital spending and the anticipated core expense growth rate.

Answer

Bradley Adams, an executive, projected mid-single-digit expense growth for 2025, likely in the 3% to 5% range, primarily driven by the salary and benefits line. He noted that significant technology and infrastructure investments were made over the past two years, so he does not anticipate major capital expenditures moving forward.

Terence McEvoy asked for details on the First Security acquisition's purchase accounting marks and their impact on TBV and EPS, as well as the long-term opportunity to grow fee income businesses like wealth management.

Answer

CFO Thomas J. Bell deferred providing specifics on the First Security acquisition's financial impact, stating that detailed guidance on marks and expenses would be given during the next earnings call. President Alberto Paracchini affirmed that growing fee income is a strategic priority, highlighting wealth management as a significant opportunity given the bank's existing commercial client base.

Terence McEvoy questioned the assumptions for loan payoffs within the mid-single-digit loan growth guidance for 2025 and which portfolios are expected to drive this growth. He also sought clarification on the full-year 2025 noninterest expense outlook.

Answer

CFO and Treasurer Thomas J. Bell noted that Q4 payoffs were elevated due to runoff from the Inland transaction and legacy syndications, which is expected to slow. President Alberto Paracchini added that the bank successfully recycled $321 million in runoff from the Inland portfolio in 2024 and expects growth in 2025 to be driven by commercial banking, leasing, and potentially commercial real estate. Tom Bell reiterated the full-year guidance for quarterly noninterest expense is between $55 million and $57 million.

Terence McEvoy of Stephens inquired about the reasons for the quarterly decline in loan originations and how higher pay-offs factor into the mid-single-digit loan growth forecast for 2025. He also asked about deposit pricing strategy and the status of the Bank Term Funding Program (BTFP) facility.

Answer

President Alberto Paracchini attributed the lower originations to normal quarterly volatility and noted that higher pay-offs were partly intentional, stemming from the run-off of non-core acquired loans, which frees up capital for relationship lending. CFO Thomas J. Bell added that pipelines remain strong. On deposits, Bell explained that the market has already reacted to expected rate cuts, with pricing on new accounts declining. Paracchini emphasized the long-term strategy of funding growth with customer deposits. Bell confirmed the BTFP facility was unwound as the spread became unattractive after the Fed's rate cut.

Terence McEvoy of Stephens Inc. asked about the medium-term opportunities to improve the bank's efficiency ratio, particularly in light of recent technology investments, and sought an update on the net interest margin's rate sensitivity and overall trajectory.

Answer

Executive Barry Ray responded that while the company maintains strong expense control, significant improvement in the efficiency ratio will likely be driven by revenue growth, projecting a range of 55% to 59%. He added that potential Fed rate cuts would be a tailwind for deposit costs and that the core net interest margin has an opportunity to 'grind' upward, aided by asset repricing.

Terence McEvoy inquired about the expense outlook for Q4 2024 and the full year 2025, the specific industries or borrower types driving the strong C&I loan growth, and the company's view on its agricultural loan portfolio amid falling commodity prices.

Answer

EVP and CFO Barry Ray provided a Q4 expense run rate of approximately $34.5 million and a full-year 2025 forecast in the mid-$140 million range. President and COO Len Devaisher and Chief Credit Officer Gary Sims attributed the C&I growth to supporting client acquisition activity, primarily in the Denver and Twin Cities markets. Sims added that the agricultural portfolio is considered resilient due to an up-tiered customer base and strong local crop yields, which help offset price pressures.

Terence McEvoy asked for details on the C&I credit workouts and charge-offs mentioned in the press release, including any specific industry trends, and questioned the outlook for the specialty finance businesses (Summit, Oak Street, Agile) in a softer economy.

Answer

President and CEO Archie Brown and Chief Credit Officer William Harrod clarified that the C&I charge-offs were dominated by a single credit—a flooring manufacturer impacted by an upstream bankruptcy—and was not a systemic issue. Brown also provided an outlook for the specialty businesses, stating Agile is seasonally strong, Oak Street's asset quality is solid, and Summit is performing well in the middle market despite some pressure on smaller ticket items.

Terence McEvoy sought clarification on the Q1 expense guidance, asking if variable costs from leasing and foreign exchange were included. He also requested more detail on the credit risk of the large classified asset related to a foreign exchange transaction.

Answer

CFO Jamie Anderson confirmed that variable compensation tied to fee income is included in the $128 million to $130 million expense guidance. Chief Credit Officer Bill Harry detailed that the classified asset is a receivable from a terminated FX forward contract that is fully collateralized by cash, real estate, and guarantees, with repayment expected in 2025.

Terence McEvoy asked for details on the $8 million in losses from securities restructuring, including the yields on securities sold, reinvestment yields, and the timing of the activity. He also questioned the credit performance of the Summit leasing portfolio relative to original projections.

Answer

CFO James Anderson explained that the bank sold $140 million of securities mid-quarter and picked up approximately 330 basis points on the reinvestment, with a payback period of about 1.7 years; the benefit is factored into Q4 guidance. Chief Credit Officer Bill Harrod stated that the Summit portfolio is performing as expected, with some manageable stress in transportation but no unusual credit issues.

Terence McEvoy of Stephens Inc. asked whether the $4 million OREO write-down was included in the full-year noninterest expense growth guidance of 3% to 4% and what this implies for the quarterly expense run rate.

Answer

CFO Derek Meyer confirmed that the $4 million OREO expense is included in the full-year guidance. He acknowledged that this suggests the first quarter's expense level was relatively high compared to the expected run rate for the remainder of the year.

Terence McEvoy asked how record-high customer satisfaction scores translate into tangible balance sheet growth, particularly regarding the core consumer deposit forecast. He also questioned how the expense guidance was formulated considering a potentially more competitive environment for C&I loan growth in 2025.

Answer

CEO Andrew Harmening explained that customer satisfaction is driving household growth, which moved from -1% in 2022 to +1% in 2024, with a 2% forecast for 2025. He noted each 1% of growth now adds about $150 million in higher-quality deposit balances. This, combined with a new deposit vertical, new RMs, and the HSA business, fuels confidence in deposit growth. Regarding competition, Harmening stated that the bank has not yet experienced significant pricing pressure on new commercial loans, attributing this to the strength of their RMs' market knowledge and relationships.

Terence McEvoy inquired about changes to the non-CD deposit strategy following the Fed's rate cut, the increase in the CRE construction reserve, and whether the current level of wealth management fees is a sustainable run rate.

Answer

CFO Derek Meyer explained that the bank has aggressively lowered deposit rates in line with the market and expects a total deposit beta of 45-46% on the way down. Chief Credit Officer Pat Ahern confirmed the CRE reserve increase was partly due to specific credit migration and a desire for extra cushion in the office portfolio. CEO Andrew Harmening noted that while the market helped, the strong wealth management fees are increasingly driven by sustainable referrals from new mass affluent and commercial banking initiatives.

Terence McEvoy from Stephens Inc. questioned the drivers of the strong loan yield increase, the resolution status of two previously discussed nonperforming loans, and the current sentiment among commercial borrowers regarding trade policy and economic uncertainty.

Answer

CEO Dennis Shaffer confirmed the loan yield increase was driven purely by disciplined pricing on new and repricing loans, with no unusual interest recoveries. He stated that $110 million in loans are set to reprice higher over the next two quarters. Regarding the nonperforming loans, Shaffer reported the multifamily loan was expected to pay off imminently, while the other C&I loan is taking longer to resolve with a bonding company. He described borrower sentiment as a "wait-and-see" approach, anticipating a near-term slowdown in CapEx spending as businesses assess the impact of tariffs.

Terence McEvoy asked about Civista's targeted loan-to-deposit ratio and whether there was any regulatory incentive to reduce brokered deposit balances. He also requested an update on the health of the non-owner-occupied multifamily loan market in metro Ohio, given softness in other parts of the country.

Answer

CEO Dennis Shaffer stated the bank is comfortable with a loan-to-deposit ratio between 90% and 95% and confirmed there is no regulatory pressure regarding brokered deposits; the focus on core deposits is a strategic move to secure cheaper funding. EVP Richard Dutton reported that the Ohio multifamily market remains healthy, with new projects seeing higher-than-projected rents and absorption rates meeting or exceeding expectations.

Terence McEvoy sought clarity on Civista's strategic targets for wholesale funding levels, the loan-to-deposit ratio, and CRE concentration. He also asked about the yields on maturing loans versus new production and the competitive landscape for re-accelerating loan growth.

Answer

President and CEO Dennis Shaffer outlined long-term goals of reducing wholesale funding to 15-17% of total funding, achieving a loan-to-deposit ratio around 90%, and bringing the CRE concentration under 300% of risk-based capital, primarily to manage stock price perception. SVP and Chief Lending Officer Chuck Parcher and SVP & COO Rich Dutton detailed that approximately $150 million in loans will reprice higher over the next 12 months, moving from rates around 4.75-5% to the high 6s or low 7s, providing margin uplift. Parcher also expressed confidence in their ability to restart loan growth back to mid-to-high single digits when desired, as they have been selectively passing on projects to manage concentration levels.

Terence McEvoy of Stephens asked for details on the repricing of fixed-rate loans for the remainder of 2025, given recent pressure on loan yields. He also questioned the health of the sponsor finance portfolio, pointing to a recent charge-off and an increase in classified assets.

Answer

CFO Michele Kawiecki stated that $190 million in fixed-rate loans are set to reprice through the end of 2025, with a current average yield of approximately 4.65%. Chief Credit Officer John Martin acknowledged a charge-off from the sponsor finance book but expressed overall satisfaction with its historical performance, noting that the portfolio is graded more aggressively and performance remains in line with expectations.

Terence McEvoy inquired about the cost of total deposits at the end of December and the outlook for deposit costs. He also asked about the specific sectors driving C&I loan momentum and the bank's appetite for growing its commercial real estate portfolio.

Answer

Chief Financial Officer Michele Kawiecki reported that December deposit costs were 2.33% and noted a downward deposit beta of 46%, expressing confidence in managing costs down further. President Michael Stewart identified the manufacturing segment and market share gains in Michigan as key drivers for C&I growth. He added that the bank has ample capacity and desire to grow its commercial real estate portfolio with quality projects in preferred asset classes, differentiating itself from peers with higher concentrations.

Terence McEvoy asked about the net interest income outlook for 2025, considering the impact of securities portfolio restructuring and potential Fed rate cuts. He also inquired about the new customer acquisition strategies following major technology upgrades and the potential size of the charge-off from a specific trucking relationship in Q4.

Answer

CFO Michele Kawiecki explained that while 2025 budgeting is ongoing, the focus is on growing net interest income despite potential margin pressure from rate cuts. She noted the branch sale and bond restructuring are long-term strategic moves. CEO Mark Hardwick detailed the new tech platforms (Terrafina, Q2, SS&C) aimed at driving core deposit growth and expanding the private wealth business. Chief Credit Officer John Martin estimated the remaining Q4 charge-off for the trucking relationship would likely be between $1 million and $2 million.

Terence McEvoy of Stephens asked for details on the yield differential between runoff indirect auto loans and new commercial loans, sought confirmation on the year-end 2025 net interest margin (NIM) target, and requested color on the drivers of recent C&I loan growth.

Answer

EVP & CFO John Stewart confirmed the indirect auto portfolio yield is in the mid-3s, providing a favorable spread when redeployed. He maintained the full-year NII outlook but noted the exit NIM might be at the lower end of the 3.15%-3.20% range. EVP & Chief Commercial Banking Officer Lynn Kerber added that new commercial loans are originating between 7% and 8.4%, while maturing loans are in the 5-6% range. She attributed C&I growth to the new Equipment Finance division and noted it was well-diversified across sectors.

Terence McEvoy asked for clarification on the net interest margin (NIM), seeking the exit rate for Q4 2024 and a ranking of the key drivers for the expected margin expansion in 2025. He also questioned whether the Q1 gain from the mortgage warehouse sale would be offset by other strategic actions and if a reserve was held against that portfolio.

Answer

John Stewart, EVP and CFO, clarified that the NIM exit rate for December was 3.03% and projected a Q4 2025 exit rate between 3.15% and 3.20%. He stated the FHLB advance payoff would provide a mid-single-digit basis point lift in Q2, with the remaining expansion driven evenly by earning asset mix improvement and liability repricing. He also confirmed the warehouse reserve was released in Q4. Executive Thomas Prame added that the gain from the sale will be recognized in Q1 and is not currently slated to be offset by other actions, thus boosting capital.

Terence McEvoy sought clarification on the Q4 net interest margin (NIM) guidance, asking for the yield on loan maturities and the expected trajectory for interest-bearing deposit costs. He also asked about internal progress and which business areas have the most potential for upside surprise.

Answer

EVP and CFO John Stewart stated that Q4 loan maturities have a yield around 6% and that the deposit cost beta on future rate cuts should be similar to the recent ~40% beta. Executive Thomas Prame highlighted the strategy of simplifying the business model and investing in core areas like treasury management, wealth, and mortgage. Mr. Prame anticipates a return to mid-to-high single-digit loan growth in 2025, which he sees as a potential breakout area.

Terry McEvoy of Stephens sought to validate his calculation that retaining the $2.4 billion in CRE loans could hypothetically boost NII by about $34.6 million, or $0.09-$0.10 in EPS. He also asked about the primary drivers behind the significant step-up in NII projected for the fourth quarter.

Answer

Executive James Ryan confirmed the hypothetical math was 'directionally correct' but cautioned that he still expects some 'selective pruning' of the portfolio, making it unlikely the full amount would be retained. Executive John Moran explained that the projected Q4 NII increase is driven by the timing of fixed-asset repricing and the back-end loaded nature of the company's organic loan growth forecast for the year.

Terence McEvoy from Stephens asked about the succession plan for the retiring President and COO, the current M&A environment, and whether there was any new information on the $100 billion regulatory threshold. He also had a modeling question about the percentage of floating-rate securities.

Answer

Executive James Ryan emphasized the importance of leadership in the Chicago market and confirmed they are considering both internal and external candidates for the COO role. On M&A, he noted that while regulatory processes may streamline, successful deals will still depend on long-term value creation. Executive John Moran provided the specific data point that 13% of the bank's securities are floating rate.

Terence McEvoy of Stephens sought confirmation on the Q4 NII accretion assumption, the deposit beta outlook beyond 2024, and common themes among the increase in non-accrual and classified loans.

Answer

CFO John Moran confirmed the Q4 NII guide assumes stable accretion of around $13 million and a 30% down-beta on deposits, which allows for offensive client acquisition. Executive Mark Sander explained that the credit migration was driven by a more conservative risk rating framework. He noted the four large non-accruals were in unrelated sectors, with one stemming from the SNC exam, and emphasized that expected loss content remains low.

Terence McEvoy asked how the company is thinking about consumer lending given the upcoming mandatory collections for student loan borrowers and requested observations on the industry sectors contributing to charge-offs.

Answer

Tyler Wilcox, President, stated that while student loan debt will be factored into underwriting and debt-to-income calculations, he does not expect it to have a meaningful impact on their consumer loan businesses. Regarding charge-offs, he explained that the small ticket leasing portfolio is heavily weighted towards the restaurant and hospitality sectors, which is consistent with the business model and yields. He also noted they have curtailed lending in other areas like title trucking and brewing equipment.

Terence McEvoy questioned the nature of acquisition-related expenses, the size of Q4 swap fees, drivers of C&I loan growth, and the outlook for CRE paydowns and the leasing portfolio.

Answer

CFO Kathryn Bailey clarified the acquisition expense was a legal contingency from the Limestone deal and that Q4 swap fees were approximately $1.2 million. Executive Tyler Wilcox stated C&I growth was broad-based, noted about $350 million in CRE maturities for 2025, and confirmed the small ticket leasing portfolio would likely decline further as it moves toward a normalized charge-off rate.

Terry McEvoy questioned competitor reactions to the Fed rate cut on deposit pricing and the rationale for adding higher-costing CDs. He also directly asked if the small ticket leasing business is accretive to shareholder value given its volatility.

Answer

Executive Tyler Wilcox described competitor deposit pricing as varied and stated their strategy is to remain 'middle of the pack' while keeping CD durations short. He strongly defended the leasing business, arguing that its high profitability and contribution to the bank's powerful margin is a worthwhile trade-off for the attention it receives, and confirmed he believes it is accretive to shareholder value.

Terence McEvoy asked for an update on the progress of Comerica's expansion efforts in the Southeast and Mountain West regions, noting the loan growth reported in the 'other markets' category.

Answer

Chief Banking Officer Peter Sefzik clarified that 'other markets' can include national business lines but highlighted strong progress in the expansion regions. He projected 'north of 50%' loan growth in the Southeast for the year and noted new leadership and hiring in the Mountain West markets of Phoenix and Denver.

Terence McEvoy asked about the potential impact of recently announced trade tariffs on commercial customers and what actions the bank is taking to mitigate risk. He also requested an update on sales initiatives and the expected timing for an acceleration in related fee income.

Answer

Chairman and CEO Brad Elliott explained that many customers have experience with tariffs and have built pass-through clauses into their contracts, though the bank has increased its loan loss reserve for general economic uncertainty. Bank CEO Rick Sems described the sales initiatives as being in the "middle innings," with increased calling activity in Q4 leading to strong Q1 loan growth, particularly in Kansas City and Tulsa. He anticipates a corresponding increase in fee income in the second half of the year.

Terence McEvoy of Stephens Inc. asked for the rationale behind the updated 2025 expense and fee income guidance and sought details on the current M&A pipeline and strategy.

Answer

CFO Chris Navratil attributed the updated expense outlook to data processing costs and people initiatives, while noting fee income guidance reflects the current run rate with potential upside. Chairman and CEO Brad Elliott confirmed active M&A discussions with 6-8 parties, several in the modeling stage, expressing strong optimism for a busy 2025.

Terence McEvoy asked about the balance sheet's positioning for future rate cuts, the strategy for acquiring new relationships while managing margins, and which markets and business lines show the most upside from new calling efforts.

Answer

CFO Chris Navratil stated that the bank has neutralized the initial 50bps rate cut impact and is positioned to manage further moderate declines by repricing funding downward while remaining disciplined on new business pricing. He identified Tulsa, Wichita, and Western Missouri as markets with strong traction. He noted that loan growth is the primary initial benefit, with deposit and fee income growth expected to follow more significantly into mid-2025.

Terence McEvoy asked for the key assumptions behind the 3.50% net interest margin (NIM) outlook, including deposit betas and noninterest-bearing deposit trends, and also inquired about which business lines possess a competitive 'moat'.

Answer

Executive Timothy Crane explained that the NIM outlook is supported by an interest-bearing deposit beta of around 65-67% and an expectation that noninterest-bearing deposits will remain stable at approximately 21% of total deposits. Executive Richard Murphy identified the premium finance businesses, the leasing business, and core C&I lending in the Chicago market as areas with strong competitive moats.

Terence McEvoy of Stephens requested more details on the bank's plans for new office openings in 2023, including the strategic focus and target markets. He also asked if checking account attrition in 2022 deviated from the historical average.

Answer

Chief Banking Officer Mike Selfridge stated the bank plans to open approximately six new offices over the next year within its existing footprint, with a focus on building full client relationships to capture market disruption. He also highlighted the recent expansion into the Seattle/Bellevue market. CEO and President Michael Roffler confirmed that checking account attrition in 2022 did not differ from the long-term average.

Terence McEvoy of Stephens asked about the strategy behind the bank's CD growth, questioning whether it was more offensive for acquiring new households or defensive for retaining existing clients. He also inquired about the competitive threat posed by high-yield online savings accounts, particularly in light of recent announcements from tech companies.

Answer

CEO and President Mike Roffler explained that the strategy is a mix of both offense and defense, as periods of uncertainty are excellent opportunities to acquire new long-term households while also deepening relationships with existing clients. Chief Banking Officer Mike Selfridge stated that high-yield online savings accounts are not considered a material competitor, as First Republic's clients value the relationship-based service model.