Cadence Bank

Hello everyone and thank you for joining the first bank board quarter 2024 and full year financial results. My name is Becky and I'll be your operator today. During the presentation you can register a question by pressing star followed by one on your telephone keypad. If you change your mind please press star followed by two. I will now hand over to your host Ramon Rodriguez investor relations officer to begin. Please go ahead.

Thank you Becky. Good morning everyone and thank you for joining first bank corps conference calling webcast to discuss the company's financial results for the fourth quarter and full year 2024. Joining you today from first bank corps are Aurelio Aleman president and chief executive officer and Orlando Verges executive vice president and chief financial officer. Before we begin today's call it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filing. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release you can access them at our website at FPPinvestor.com. At this time I'd like to turn the call over to our CEO Aurelio

Aleman. Thank you Ramon. Good morning to everyone and thanks for joining our earnings call today. I will begin by briefly discussing the business performance for the fourth quarter then we'll move on to provide some high-level highlights of how we perform during the full year. We're quite excited how we closed 2024 and with another quarter of consistent execution and strong financial performance. We earned 76 million in net income and grew pre-tax pre-provision income by 5% to 170 million primarily driven by net interest margin income expansion and our discipline expense management process. Return average asset was again strong at .56% and the organization continued to operate at an efficiency ratio close to 52% which is in line with our guidance. Turning to the balance sheet the quarter was strong total loans grew by 303 million of .7% quarter analyzed driven by growth actually across all business segments consumer, commercial, and mortgage and between Puerto Rico and the Florida region primarily particularly within the commercial and construction lending segments. However we saw we were expecting some portfolio repayments in the quarter which came a little bit lower. We anticipate that some of that will come between the first and second quarters this year in the range of probably 5200 million. In terms of deposit, core deposit trends were also very encouraging with total deposits other than broker and government up 2% sequentially from private quarter and 4% when we include you know government deposit. As we have seen in private quarters we did some we see some additionality in deposit inflow during the quarter that you know they are temporary in nature or they have to do with the variability of the government sector funding of reconstruction activity. Credit performance was relatively stable during the quarter with non-performing asset hitting another record low of 61 basis points of total assets. On the capital front liquidity our liquidity and capital position remains very strong. We sustain our commitment to deliver over 100% of earnings in the form of capital actions by redeeming 50 million of our outstanding junior debentures and paying 26.3 million in common dividends. Even when accounting for these actions our regulatory capital ratios increased during the quarter and remained significantly above well capitalized. We still have 200 million left in our capital plan authorization which we expect to continue deploying through 2025 in a matter that best suits the long-term interest of the franchise. Please let's turn to slide five to provide some highlights of the year. The solid performance of the quarter got a year of record results for the franchise in the back of a positive economic backdrop of our operating markets. We raised actually total record revenue 6% increase in annual per share and reach a multi-year low in non-performing assets. The low portfolio expanded by .7% of 569 million. We added 267 million in our capital. Before customer deposit and distributed 100% of earnings to shareholders, long growth was actually quite in line with our guidance of mixed single-digit growth. Consistent with our strategy our well position balance sheet allows to capitalize on bond book and non-repricing opportunities under the current rate environment while proactively managing the cost that actually will continue through 2025. We're considering stable deposit going forward. Our asset mix will continue to scoot towards a skew towards higher dealing assets which coupled with gradually declining funding costs should drive additional net interest income expansion in 2025. Over the course of 2024 our franchise made great progress advancing technology initiatives to improve our interaction with customers through both the convenience of digital channels and service focused relationship officers. We are achieving the targets we set to make sure our strategy is a success and we're seeing the benefit of the investment we made in technology to accelerate our growth and improve how we serve our communities and customers. As we look ahead the operating environment for 2025 actually the operating environment seems to be conductive of another year of positive performance and organic capital generation. If we look at the key economic metrics in the environment during the fourth quarter phased unemployment continue to improve tourism metrics and passenger activity are our main airport rich record levels again and disaster relief funds disburse and register another year of sequential increments in 2024. We do expect this trend to continue as per the Puerto Rico planning board is forecasting another year of economic growth in 2025. So given this backdrop for 2025 we're sustaining our meeting of the long-term guidance. We're sustaining our 100% net payout ratio of our capital. That includes redeeming the remaining 61 million of toward units related to the ventures and executing recent or which are repurchase opportunities and definitely maintaining a sustainable dividend payout policy. In light with this guidance we were very pleased to announce this week that our board approved 13% increase in our quarterly commons dividend that was raised to 80 cents per share. Again we will continue to monitor general macro, how things develop, political changes as we execute our strategy, as we execute our capital deployment plan and to close I have to say that I'm really really proud of what our teams have accomplished so far. We are very positive and look forward to a very positive 2025 with optimism and excitement of what lies ahead of us. Now I will turn the call over to Orlando to go over some more detail and we will be back for questions. Thanks to all.

Good morning everyone. Saurelio mentioned we recorded very strong results during the quarter earning 75.7 million in net income or 46 cents a share which compares with 45 cents a share in the third quarter. We saw the results for the quarter saw improvements in net interest income which were partially offset by the higher provision for credit losses. The provision for the fourth quarter was 5.7 million higher than last quarter but this was mostly related to a 5.5 million release we had in the allowance for residential mortgage loans during the third quarter based on the consistent positive outlook on microeconomic variables but also this quarter we provided for the higher loan portfolios that we achieved at the end of the quarter. In general the economic outlook remained fairly consistent going forward from what we had in the third quarter in terms of estimating the allowance. Income tax expense for the quarter was 20.3 million which is 2.3 million lower than last quarter. At the end we ended up with a higher proportion of exempt income for the year which resulted in a slightly lower effective tax rate. The effective tax rate was just under 24 percent for the year 24 and we're expecting that tax rate for 25 will be in that same range from 24 to 24.5 percent. For the full year 24 net income was 299 million very similar to the 303 we achieved in 23 but earnings per share were $1.81 or for this year which is 10 cents higher than we had in 23 which is the benefit of the share count reduction based on the buybacks we have done over the last few years. Return on average assets for the year was 158 and return on equity was 19.1 percent on a gap basis. If we were to eliminate the other comprehensive loss impact from the capital on a non-gap basis the adjusted return equity would be 13.6 percent. As I mentioned that interest income for the quarter was 7.2 million higher than last quarter reaching 209.3 million. You might recall from last quarter's earnings call we had mentioned that we were expecting that the net interest margin for the fourth quarter would be similar to the third quarter. However we were able to achieve an eight basis points improvement in margin from 425 to 433 in this fourth quarter. At that time we were expecting loan repricing impact would offset some other improvements even though we did see that repricing impact on the floating rate commercial loans. The commercial portfolio grew on average 192 million more than compensated for this pricing reduction while we achieve 37 million in growth in the residential and consumer portfolios. Also growth in deposits for the quarter allowed us to reinvest about 220 million of maturing investment securities at a rate of 540. We look at cash flows during the quarter cash flows for the investment portfolio were 470 million and that includes 367 million in securities that mature with an average deal of 65 basis points. So the pickup in margin in yield was quite significant as compared to those 65 basis points. The deposits on interest-oriented retail and commercial transaction accounts grew 348 million on average for the quarter. These deposits have an average cost of 1.52 percent. On the other hand higher cost time deposits and brokerage CDs decreased by 130 million. Also during the quarter junior subordinate debentures with a cost of 78 million decreased by with a cost of 7.78 percent I'm sorry decreased 50 million on average and we did redeem an additional 50 million at the end of the third of the fourth quarter. The impact would be seen you know now in 2025. The reduction in borrowings and broker CDs resulted in interest expense reduction of 2.8 million for the fourth quarter. As we look ahead into 2025 we still see opportunities for both net interest income and margin expansion as we redeploy what we estimate to be somewhere between 1.5 to 1.6 billion of investment portfolio cash flows in 2025 that are currently yielding about 1.25 percent towers other you know either loans or higher yielding securities or you know paying down some of the higher cost borrowings. If we were to assume normal flow of deposits we expect that margin could improve around 20 basis points by the end of 2025. In terms of other income was fairly online it was down a bit mostly from a decrease in insurance income due to lower production. On the expense side expenses were 124.5 million 1.6 million increased from the third quarter. Oreo gains this quarter were 1 million or 300,000 less than last quarter excluding oreo expenses for the quarter were 125.6 million which is at a 1.3 million higher than last quarter and higher than the top range guidance we had provided. The increase was in part related to business promotion initiatives that took place at the end of the year and were a bit higher than we had originally anticipated. However we did register operating leverage as they increase in their net interest income was enough to offset increase in expenses resulting in a lower efficiency ratio of 51.6 percent for the quarter. Based on the current stage of several ongoing technology projects branch network expansions planned for 2025 we estimate that our expense base for the next couple of quarters would be in the range of 125 to 126 million excluding any oreo gains. We continue to estimate that our efficiency ratio will be around 52 percent considering the changes in expenses and income components. In terms of asset quality NPAs decreased 800,000 dollars that now represent 61 basis points of assets. Most of the reduction was due to a repayment of a 1.8 million on a cruel commercial loan. Inflows for the quarter were 1.6 million lower than last quarter mostly consumer even though we have seen some early delinquency increases. The macro is fairly stable and the labor market is healthy but consumer credit continues to show weaknesses. Overall loans in early delinquency increased 9.6 million from last quarter with consumer loans increasing 14 million obviously offset by a decrease of 5.4 million in commercial loans. We continue to proactively manage this correct cycle on the consumer side and the advantages that had impacts and we're estimating somewhere in the middle part of the year to achieve the stability we had anticipated on the consumer. The allowance for credit losses decreased 3.1 million to 244 million during the quarter mostly from 4 million reduction in the allowance for commercial loans. Based on the improvements we have seen on both the financial condition of borrowers and obviously the macroeconomic forecast particularly on the consumer real estate indexes which have continued to show improvement. The allowance for the consumer portfolios did increase 1 million due to the recent loss trends. Overall the allowance came down to .91% of loan from 1.98 as we continue to see these good credit trends in the commercial and residential mortgage portfolio. However the allowance on consumer loan has gone up to .85% of loans based on loss trends that we have had in the portfolio. Net charge for the quarter were 24.6 million or 78 basis points of average loans pretty much in line with the prior quarter. Consumer charge of increased 1.3 million but we had a 1.2 million decrease in commercial charges. On the capital front regulatory ratios increased during the quarter and we continue to operate significantly above the regulatory well capitalized levels. We deployed as Aurelio mentioned 100% of our quarterly earnings for the redemption of 50 million in the union subordinated ventures and 26 million payment of common dividends consistent with the guidance we have provided. The tangible value per share did decrease to 991 and TCE decreased to 8.4 which was mostly due to 182 million decrease in the fair value of available for sale investment portfolio. The remaining adjusted other comprehensive loss that we have on the books still represent three dollars and 41 cents in tangible book value per share and over 258 basis points in intangible common equity ratio. You know we as Aurelio mentioned we will continue to deploy our six capital in a thoughtful matter always looking for the long-term best interests of our franchise and our our shareholders. This concludes our remarks. Operator please open the call for questions.

Thank you. As a reminder to ask a question please press style followed by one on your telephone keypad now. If you change your mind please press style followed by two. When preparing to ask your question please ensure your device is unmuted locally. Our first question is from Frank from Piper Sandler. Frank your line is not open please go ahead.

Thanks good morning. Good morning. I'm the 52 efficiency ratio for 2025. You know I guess that's just sustaining where you are right. I mean I believe that's a non-FTE NII is in that calculation but then can you just remind us is the our Aureo gains is there some level of that assumed in 2025 that's also in that calc or could Aureo gains kind of move that even lower?

No it's included in that. We do you know the numbers have been coming down as we have mentioned. We do expect to still achieve probably Aureo gains on first half of the year but that's significantly going to go down by the second half of 2025. So it's mostly the other expense components and obviously the income side as you mentioned.

Okay and you've been pretty consistent there around that 52 percent level. You know how focused are you I guess in 2025 on that? Do you see opportunities to ramp up or delay investments depending upon you know the revenue outlook to kind of really hone in on that 52 percent?

Well in reality you know we see we see the consistent the consistent the revenue side and the we're counting on some of the opportunities that we're executing. As Rolando mentioned we expect some margin improvement. You have the reinvestment on the portfolio or the cash flows and then we have you know a single you know mid-single day target of growing the portfolio again. So those components you know we bring some revenue. We're not really stopping on investments you know we have included we are including you know significant investment in technology to continue which is is bringing other benefits with some of them will be more terminal they are. And we also have some branch openings that are part of that number that will start you know happening during the you know we're moving branches into areas that we're not we don't have a presence where there is a deposit opportunity and a commercial bank opportunity on this on the small and medium market side. So you know we're not really holding on those investments.

Okay and then just a point of clarification I just Rolando I heard you mention the NIM I think you said NIM could be up to 20 basis points year over year is that the number you gave?

20 basis points is you know based on the quarterly pickup we expect it's it would be like the margin at the end of the fourth quarter of the year as compared to the to the to the fourth quarter of 2024. That's what we're talking it's like with the reinvestment of the portfolio and obviously considering expected deposit flows and unexpected new loan productions we believe margin will continue to pick up based on on that as I mentioned the cash flows that are coming from the investment portfolio or estimated cash flows that are going to be around one and a half to 1.6 billion in 2025. On average yield 125 it's not equally distributed it's it's the ones that mature in the first half of the year are like 150 and then the other half it's smaller it's a lower amount of yield but it's still you're going to get a good take up on on on the reinvestment or the or the the amounts that could be channeled to to loan portfolios. You know the obviously we're still you know dealing with what's the expectation on rates we had 100 basis points assumption originally in like three months ago that would happen in 25 but now we we feel it's probably going to be 25 or 50 basis points so we will see that part of it but still you know the assuming these rates and the pick up on on those components we will have a good push on the margin.

Okay and then just just lastly on the I think there's there's about 60 million I think you said in redemption left so is it a pretty fair expectation or assessment that stock buybacks is probably another quarter of to go before you get back into the market there and and repurchases will be sort of the return to capital story more for the last three quarters of the year.

Yeah I think your assessment is the most probable scenario right now as we speak. Yeah okay

all right great thank you.

Thank you our next question is from Tamer Brasília from Wells Fargo your line is not open please go ahead.

Hi good morning. Morning Tamer. Looking at the looking at the link quarter deposit growth particularly on the public fund side I guess what was the dynamic this quarter that drove balances higher in a period that maybe typically see some seasonal outflows was that market share gain is a little bit transitory in nature maybe just give us a dynamic to some of the deposit growth I would

say there's a combination obviously we have a very strong strategy that we're executing on cash management payment services to government entities and municipalities and that is coupled with you know the parallel strategy that we have with some of the large participants in the reconstruction area so there was inflow of funds from both sides you know obviously on the on the infrastructure side there's always some chunkiness of funds that come in and out so that was not the growth of the entirely the growth is really the net of what came in and out so it was a significant quarter of projects and funds moving from FEMA or CDBG into these entities for completing projects so it's a combination you know we have a core strategy on services to municipalities and other entities and we have a strategy to support you know the the entities that are actively in the reconstruction phases yeah but yes there's always some seasonality in the later part of the year yeah yeah

okay for the loan growth you know the the US mainland loan growth was strong in 4q looked like CNI on the Virgin Islands is also pretty strong in 4q can you just maybe give us a little bit of color where you're seeing the growth on the mainland and is that primarily where you were expecting maybe some elevated payoff activity that didn't come to bear in the quarter yeah

the the you know i think you know when you look at the core strategy of Florida again is commercial in all the segments small middle and large with the balance sheet of the larger corporation which is part of the region is part of the of the larger bank so you know if you look through the year there's there was also you know good quarters and and active quarters obviously you know we it happened last year too that we have supported up you know some of the cases that closed that were pending to close finally concluded in the year so there's some and then in Puerto Rico there's some large deal and construction you know noise that happened also in the quarter some of them will move ahead or completed so again it's very difficult to predict at the pace that's why we focus on the mixed single dg when we add a subtract so we do expect more growth in the commercial this year we expect some growth in the mortgage we didn't have last you know in in the plans before and and and then continue to have growth in the consumer even though we we acknowledge is as a lower rate growth rate than we had achieved over last five years it's just you know the the different cycles of of each of the business and portfolios and then you know we have booked you know construction loans that will continue to fund until completion which was probably one of the highlights of 2024 the volume of construction activity that was booked that is is there and will continue to it doesn't need to close along for this person to continue to to to move on ahead so it makes that you know and then just predict predicting predicting quarter by quarter you know it's it's almost impossible for for this commercial activity yeah

okay makes sense and then just last for me looking at the allowance looking at the performance of the consumer i guess a what gives you greater confidence that consumer credit begins to stabilize middle of 25 and then b as we look at all the different components of the allowance you know it's come down now for six straight quarters it looks like are we nearing a plateau there for for allowance or do you foresee continued mix shift and continued ability to maybe continue releasing some reserves here throughout the course of the year

if that the you know we have to be right about portfolio we we feel that the residential mortgage portfolio has continued to behave extremely well as that's what ended up resulting in some releases home price index has been very strong and and home sale prices that uh you know that that we see on even on the oreos we sell that are are definitely strong so that helps that um i i think that probably probably there's a little bit in there not not necessarily a lot based on the size of the portfolio it's going to the portfolio has been growing a little bit as compared to what we had before that we were coming down on on the commercial side probably we're we're there i mean it's it's um you know it's been quite good for quite quite a long time on the consumer side we still as i mentioned feel you know there is some volatility is you know the the allowance on on the on the consumer side has gone up like 20 basis points from from the end of 23 to the end of 24 or something like that and and obviously the growth has mostly been on on the auto portfolios that entail lower losses but but there is still going to be a little bit of noise i i would say on the allowance so in general we would be sort of at this level is my expectation for the next the next couple of quarters

great thank you

thank you our next question is from kelly motto from kbw your line is now open please go ahead

hey good morning thanks for the question um i was hoping you'd dig in um a bit more um on expenses i appreciate the i think he said 125 to 126 million per quarter outlook but um looking at fourth quarter can you remind us um it looks like you've had a larger kick up in business promotion expenses um in the fourth quarter these past two years um can you write us the seasonality of that and kind of um if that had any relation to um you know the meaningful increase in deposit fees on this quarter

um well the the the end of the year typically has a combination of things it's um events we we do for customers uh as part of the you know year-end kind of uh of uh prison celebrations and recognition of of us recognizing our customers loyalty so that's one thing uh there are trends on on um on campaigns that we would like to start early in 25 that we start you know towards the end of the year to start moving some things um those those are mostly on on on the lending side not so much on the on the deposit side obviously you know things on on the the deposits are are big and and we try to push for that and participation in in activities that happened at the end of the year so it's a it's a combination of it's directly completely related to what the deposit the deposit growth i wouldn't say that uh but clearly uh our marketing people are going to say yes that it has to do with all the different efforts they put out there

um i i appreciate that um and i mean the deposit gross is us obviously very nice um and i understand um partly seasonal and partly um you know unique to um flows that's what's happening with government deposits but um i'm hoping just on on the core puerto rico deposit base i was hoping you could update on um just the competitive environment there if you're seeing you know any ability to you know lower those core deposit costs which are already you know pretty low when compared to mainland banks and rationally priced

to be honest you know if rentals move lower than they are today we don't see a lot of opportunities in what is in the core core i think competitively is reasonable but but obviously the the movement in rates is not it's not supporting at this stage that that any other competitor you know still you know behaving like in in that scenario of lowering rates so i think we have to see you know what happened with the with the fed and and and the potential in a you know additional on the other hand there is you know a lot of funding that is uh that is uh maturing and it's already being you know uh either either eliminated or out of the cost or or or it's being renewed at a lower rate so

yeah there are opportunities on on the um broker cities as whatever we renew uh if we redo anything rates are lower than what what they're coming to uh same thing we we do some opportunities and in some of the advances we take on the from the FHLB um some some of the government deposits have been repriced as uh treacherous uh rates have come down but some of the core accounts i i still feel like a little that uh you know that they are they are not necessarily going to come down a lot assuming rates are at this level

got it um maybe last question for me is just on on balance sheet size i think you you already hit on this um pretty well but i just as a point of clarification um earning assets for the quarter were about just over 19 billion um it sounds like based on the cadence of um investment portfolio maturities like 1.5 to 1.6 coupled with your -single-digit loan growth guidance it seems like the balance sheet is probably flat to slightly down over over 2025 is that is that the right way to think about it as we we look ahead with the positive growth in nai just driven off of the the remix into higher yielding assets

the yeah the the the way i the way i see it uh kelly it's uh you know the cash flows from the investment portfolio are not necessarily going to reduce the the the the size of the balance sheet because we'll end up mostly with other investments or with uh with loans uh you know there is a level of investment uh that we need to keep on the books for colada for public funds and some of the other things that we do so we we are we we have taken down that portfolio significantly on all the excess that we had uh but it's now reaching a level that we're probably going to be you know either going to loans or slightly or going to securities so that would keep the balance sheet sort of where we are you know you know we grow the investment the loan portfolio as expected uh it's going to push that a little bit up obviously deposits have a lot to do with this so so you know the assumption that it's sort of flat to i would say flat to slightly higher other than some of the seasonality aurelio mentioned the deposit so it's that range of uh 188 to 19 three or four rights it's probably going to be a reasonable range of the balance sheet size

awesome thank you thank you so much for all the color i'll set back

thank you kelly

um thank you our next question is from steve moss from raymond james your line is now open please go ahead

good morning maybe just on morning i just on loan pricing here i apologize if i missed it but just kind of curious you know given the rate volatility we've seen here over the last couple of months you know what you guys are seeing for for loans these days

loan pricing you mean

yeah

well we i mean it hasn't changed much in terms of what what what you would call the spread no obviously pricing has has come down a bit in because uh you know we most of the pricing it's either liver based or or so for base so far it's down and prime is down so that that means that pricing on some of the portfolios have been down doesn't necessarily mean that the spread it's down from what it used to be that i'm talking commercial at this point on the consumer side it's changed a bit but uh you know the credit cards we do we do adjust based on prime but some of the other portfolios have remained fairly consistent so if you think about yield the loan yields are down like 20 basis points or or 10 basis points compared to last quarter

actually 12 is the loan portfolio gil on page uh eight of the presentation the the overall one portfolio so

that's been that's been a function of you know the the 52 53 percent floating components that we have on the on the commercial side more more than anything uh that that reprice with prime and uh and uh so far mostly a little bit a little bit with with treasury uh but but other than that i i would say it's similar kind of uh of pricing strategy

okay great appreciate that and then in terms of just the the billion five and cash flows it sounds like it's fairly just equally distributed um over the four quarters is that a fair assumption

no let me give you some some color in that it's not equally um hold on one second so it's gonna be about um first first quarter it's maybe somewhere between 325 and and and 375 it's a range we estimate uh second quarter it's gonna be around 240 to 260 uh fourth quarter third quarter i'm sorry it's somewhere around 400 and and the last quarter it's going to be about 525 to 550

okay great appreciate all that most of my questions all my questions is asking answer at this point so thank you very much

thank you steve

thank you we currently have no further questions so i'll hand back to ramon for closing remarks

so thanks to everyone for participating in today's call we will be attending b of a's conference in miami on february 11 kvw's conference in boca on february 13th and ramon james conference in orlando on march 4 we look forward to seeing a number of you at these events and we greatly appreciate your continued support have a great day thank you thank you

all this concludes today's call thank you for joining you may now disconnect your lines