Cadence Bank

Hello everyone and thank you for joining the first Bancorp fourth 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 FirstBank Corp's conference call and webcast to discuss the company's financial results for the fourth quarter and full year 2024. Joining you today from FirstBank Corp are Aurelio Alemán, President and Chief Executive Officer, and Orlando Vergés, 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 Alemán.

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 performed 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 117 million, primarily driven by net interest margin income expansion and our discipline expense management process. Return average asset was again strong at 1.56%, 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 9.7% per quarter annualized, 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 in, you know, between the first and second quarter of this year in the range of probably $5,200 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 quarters and 4% when we include government deposits. As we have seen in private quarters, we see some seasonality in deposit inflows during the quarter that 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 assets hitting another record low of 61 basis points of total assets. On the capital front and 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 what capitalized. We still have $200 million left in our capital plan authorization, which we expect to continue deploying through 2025 in a manner that best suits the long-term interests 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 any per share, and reached a multi-year low in non-performing assets. The portfolio expanded by 4.7%. of $569 million, we added $267 million in core customer deposit and distributed 100% of earnings to shareholders, loan growth was actually quite in line with our guidance of mid-single-digit growth. Consistent with our strategy, our well-positioned balance sheet allows us to capitalize on bond book and loan repricing opportunities under the current rate environment, while proactively managing funding costs that actually will continue through 2025. We're considering stable deposits going forward. Our asset mix will continue to skew towards higher-yielding assets, coupled with gradually declining funding costs to 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 relationships with officers. We are achieving the targets we set to measure our strategic 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 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, payroll employment continued to improve. Tourism metrics and passenger activity at our main airport reached record levels again. and disaster relief fund disbursement rate raised to another year of sequential increments in 2024. And 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 mid-single G loan growth guidance. We're sustaining our 100% net payout ratio of our capital. That includes redeeming the remaining $61 million towards units that were into the ventures and executing reasonable share repurchase opportunities and definitely maintaining a sustainable dividend payout policy. In line with this guideline, we were very pleased to announce earlier this week that our board approved 13 percent increase in our quarterly common stock dividend that was raised to 18 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 to a very positive 2025 with optimism and excitement of what lies ahead of us. Now I will turn the call to Orlando to go over some more detail and we will be back for questions. Thanks to all.

Good morning, everyone. As Aurelio mentioned, we recorded very strong results during the quarter, earning $75.7 million in net income, or $0.46 a share, which compares with $0.45 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. The 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% for the year 24, and we're expecting that tax rate for 25 will be in that same range from 24 to 24.5%. 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 for this year, which is $0.10 higher than we had in 2023, 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 $1.58. And return on equity was 19.1% on a GAAP basis. If we were to eliminate the other comprehensive loss impact from the capital on a non-GAAP basis, the adjusted return equity would be 13.6%. 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 achieved $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 for retail and commercial transaction accounts grew 348 million on average for the quarter. These deposits have an average cost of 1.52%. On the other hand, higher-cost time deposits and broker CDs decreased by $130 million. Also, during the quarter, junior or subordinate ventures with a cost of 78 million decreased by, with a cost of 7.78%, I'm sorry, decreased 50 million on average. And we did redeem an additional $50 million at the end of the fourth quarter. The impact would be seen now in 2025. The reduction in borrowings and broker CDs resulted in an 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. we redeploy what we estimate to be somewhere between 1.5 to 1.6 billion of investment portfolio cash flows in 25 that are currently yielding about 1.25% towards other either loans or higher yielding securities or 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, it 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. 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 $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 increasing net interest income was enough to offset increase in expenses, resulting in a lower efficiency ratio of 51.6% for the quarter. Based on the current stage of several ongoing technology projects, branch network expansions planned for 25, 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% considering the changes in expenses and income components. In terms of asset quality, NPAs decreased $800,000. That now represents 61 basis points of assets. Most of the reduction was due to a repayment of $1.8 million on accrual commercial loans. 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 great cycle on the consumer side and the ventures that had impacts, and we're estimating somewhere in the middle part of the year towards the end 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 a $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 1.91% of loan from 1.98. As we continue to see this trend good credit grants in the commercial and residential mortgage portfolio. However, the allowance and consumer loan has gone up to 3.85% of loans based on lost rents 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-off increased $1.3 million, but we had a $1.2 million decrease in commercial charge-off. 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 of Subordinated Ventures and $26 million payment of common dividends. are consistent with the guidance we have provided. The tangible book value per share did decrease to 991, and TCE decreased to 8.4, which was mostly due to an 82 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 $3.41 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 excess capital in a thoughtful manner, always looking for the long-term best interest of our franchise and 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 Chiraldi from Piper Sandler. Frank, your line is not open. Please go ahead.

Thanks. Good morning. Morning. Good morning, Brent. On the 52% efficiency ratio for 2025, you know, I guess that's just sustaining where you are, right? I mean, I believe that's non-FTE NII is in that calculation. But then can you just remind us, are Oreo gains, is there some level of that assumed in 2025 that's also in that calc? Or could Oreo 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 earlier gains on the 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% 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%?

Well, in reality, you know, we see the consistency on the revenue side and we're counting on some of the opportunities that we're executing. As Fernando mentioned, we expect some margin improvement. You have the reinvestment on the portfolio, 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 significant investment in technology to continue, which is bringing other benefits. Some of them would be more long-term, but they are. And we also have some branch openings that are part of that number that will start happening during the... We're moving branches into areas that we don't have a presence, where there is a deposit opportunity and a commercial bank opportunity on the small and medium market side. So, you know, we're not really halting on those investments.

Okay. And then just to point of clarification, I just, Orlando, I heard you mentioned 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 based on the quarterly pickup we expect. It would be like the margin at the end of the fourth quarter of the year as compared 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 expected new loan productions. We believe margin will continue to pick up based 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 $1.5 to $1.6 billion in 2025, on average yield $125. It's not equally distributed. The ones that mature in the first half of the year are like $150 billion. And then the other half, it's smaller. It's a lower amount of yield. But still, you're going to get a good take-up on the reinvestment or the amounts that could be channeled to loan portfolios. Obviously, we're still dealing with what's the expectation on rates. We had 100 basis points assumption originally like three months ago, that would happen in 25. But now we feel it's probably going to be 25 or 50 basis points. So we will see that part. But still, you know, assuming these rates and the pickup on those components, we will have a good push on the margin.

Okay. And then just lastly on the, I think there's about 60 million, I think you said, in redemption left. So is it a pretty fair uh expectation or assessment that stock buybacks uh is probably another quarter of uh to go before you get back into the market there and and uh and and and repurchases will be um sort of the um uh return to capital uh story more for the last um three quarters of the year yeah i think your assessment is the most probable scenario right now as we speak

Okay.

All right, great. Thank you.

Thank you. Our next question is from Tamar Brasilia from Wells Fargo. Your line is now open. Please go ahead.

Hi, good morning. Good morning, Debra. 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 sees some seasonal outflows? Was that market share gain? Is that 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 infrastructure side, there's always some chunkiness of funds that come in and out. So that was not – the growth was not necessarily – the growth is really the net of what came in and out. So it was a – a significant quarter of projects and funds moving from FEMA or CDBG into these entities for completing projects. So it's a combination. We have a core strategy on services to municipalities and other entities, and we have a strategy to support the entities that are actively in the reconstruction phases. But yes, there's always some seasonality in the later part of the year.

Okay. For the loan growth, you know, the U.S. mainland loan growth was strong in 4-Q. It looked like CNI on the Virgin Islands was also pretty strong in 4-Q. Can you just maybe give us a little bit of color of 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 fourth quarter?

Yeah, I think when you look at the core strategy of Florida, again, it's 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 larger bank. So if you look through the year, there was also good quarters and active quarters, obviously, you know, it happened last year too that we have supported that, 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 move ahead or completed. So again, it's very difficult to predict at the pace. That's why we focus on the mixing of DG when we add and subtract. So we do expect more growth in the commercial this year. We expect some growth in the mortgage we didn't have in the plans before, and then continue to have growth in the consumer, even though we acknowledge it as a lower growth rate than we had achieved over the last five years. It's just the different cycles of each of the business and portfolios. And then we have both construction loans that we'll continue to fund until completion. which was probably one of the highlights of 2024, the volume of construction activity that was booked that is there and will continue to, it doesn't need to close along for this person to continue to move on. Go ahead. So it's a mix that, you know, predicting quarter by quarter, you know, it's almost impossible for this commercial activity, yeah.

Okay, it 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, you know, six straight quarters, it looks like. Are we nearing a plateau there 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?

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

Great. Thank you.

Thank you. Our next question is from Kelly Motta from KBW. Your line is now open. Please go ahead.

Hey, good morning. Thanks for the question. I was hoping to dig in a bit more on expenses. I appreciate the, I think you said $125 to $126 million per quarter outlook, but looking at fourth quarter, can you remind us, it looks like you've had a larger kick up in Leigh Anne Touzeau- Business promotion expenses in the fourth quarter these past two years um can you read the seasonality of that and kind of. Leigh Anne Touzeau- If that had any relation to you know the meaningful increase in deposits, you saw this quarter.

Leigh Anne Touzeau- The. The end of the year typically has a combination of things. It's events we do for customers as part of the year-end kind of Christmas celebrations and recognition of us recognizing our customers' loyalty. So that's one thing. There are trends 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. Those are mostly on the lending side, not so much on the deposit side. Obviously, you know, things on the digital front and the deposits are big, and we try to push for that. and participation in activities that happen towards the end of the year. So it's a combination. Is it directly completely related to the deposit growth? I wouldn't say that. But clearly, our marketing people are going to say yes, that it has to do with all the different efforts they put out there.

I appreciate that. And I mean, the deposit gross is obviously very nice, and I understand partly seasonal and partly unique to flows. That's what's happening with government deposits. But I'm hoping just on the core Puerto Rico deposit base, I was hoping you could provide an update on 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 rates don't move lower than they are today, we don't see a lot of opportunities in what is in the core. I think competition is reasonable. But obviously the movement in rates is not supporting at this stage that any other competitor, you know, behaving like in that scenario of lowering rates. So I think we have to see, you know, what happened with the Fed and the potential, you know, additional moves. On the other hand, there is, you know, a lot of funding that is maturing and is already being either eliminated or out of the cost or is being renewed at a lower rate.

Yeah, there are opportunities on the broker cities, whatever we renew. If we renew anything, rates are lower than what they're coming due. Same thing, we see some opportunities in some of the advances we take from the FHLB. Some government deposits have been repriced as treacherous rates have come down. But some of the core accounts, I still feel like, Aurelio, that they are not necessarily going to come down a lot assuming rates are at this level.

Erika Moritsugu- got it maybe last question for me is just on on balance sheet size, I think you already hit on this pretty well, but just as a. Erika Moritsugu- point of clarification earning assets for the quarter we're about just over 19 billion it sounds like based on the cadence of. Erika Moritsugu- Investment portfolio maturities like 1.5 to 1.6 coupled with your mid single digit low growth guidance, it seems like the balance sheet is probably. flat to slightly down over 2025? Is that the right way to think about it as we look ahead with the positive growth in NII just driven off of the remix into higher yielding assets?

The way I see it, Kelly, the cash flows from the investment portfolio are not necessarily going to reduce the size of the balance sheet. because we'll end up mostly with other investments or with loans. There is a level of investment that we need to keep on the books for collateral for public funds and some of the other things that we do. So we have taken out that portfolio significantly on all the excess that we had, but it's now reaching a level that we're probably going to be either going to loans or going to securities. So that would keep the balance sheet sort of where we are. We grow the investment, the loan portfolio, as expected. It's going to push that a little bit up. Obviously, deposits have a lot to do with it. So the assumption that it's sort of flat I would say flat to slightly higher, other than some of the seasonality Aurelio mentioned on the deposit. So with that range of 18.8 to 19.3 or 4, it's probably going to be a reasonable range of the balance sheet size.

Awesome. Thank you so much for all the color. I'll step back.

Thank you, Kelly.

Thank you. Our next question is from Steve Moss from Raymond James. Your line is now open. Please go ahead.

Good morning. Good morning, Steve. Maybe just on loan pricing here, I apologize if I missed it, but just kind of curious, given the rate volatility we've seen here over the last couple of months, what you guys are seeing for loans these days?

Loan pricing, you mean? Yeah. Well, I mean, it hasn't changed much in terms of what you would call the spreads. Obviously, pricing has come down a bit because most of the pricing is either LIBOR-based or SOFR-based. SOFR is down and Prime is down. So that means that pricing on some of the portfolios have been down. It doesn't necessarily mean that the spread is down from what it used to be. I'm talking commercial at this point. On the consumer side, it has changed a bit. But the credit cards, we do adjust based on prime. But some of the other portfolios have remained fairly consistent. So, if you think about yields, loan yields are down like 20 basis points or 10 basis points compared to last quarter.

Actually, 12. If you look at the loan portfolio yield on page 8 of the presentation, the overall loan portfolio.

So, that's been a function of, you know, the 52, 53% floating components that we have on the commercial side more than anything. That reprice with Prime and so forth, mostly. A little bit with Treasury. But other than that, I would say it's similar kind of pricing strategy.

Okay. Great. Appreciate that. And then in terms of just the billion five in cash flows, it sounds like it's fairly just equally distributed over the four quarters. Is that a fair assumption?

No, let me give you some color on that. It's not equally. Hold on one second. So it's going to be about first quarter, it's maybe somewhere between 325 and 375. It's a range we estimate. Second quarter, it's going to be around 240 to 260. Fourth quarter, third quarter, I'm sorry, it's somewhere around 400. 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 have been answered 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.

Thanks to everyone for participating in today's call. We will be attending BOA's conference in Miami on February 11, KBW's conference in Boca on February 13, and Raymond 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.