Cadence Bank
NYSE:CADE
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Cadence Bank
Earnings Call Analysis
Q4-2023 Analysis
Cadence Bank
Cadence Bank's recent earnings call was a blend of reflection and forward-looking optimism. They closed the year with strategic moves including the closure of 35 branches and a voluntary retirement program that reduced headcount by nearly 500, excluding the impact of their insurance business sale. This sale unlocked substantial capital, which they used to restructure 25% of their securities portfolio, enhancing liquidity and capital ratios. The bank achieved a $2.1 billion loan balance growth and reported a stable total criticized loan ratio of 2.09%, signaling a robust credit quality and providing the bank with flexibility in capital management. Overall, the bank believes their actions have positioned them well for future growth and stability.
From a numbers perspective, Cadence Bank's fourth quarter reflected a compelling narrative. Net income from continuing operations was robust, and overall GAAP net income stood at a healthy $256.7 million for Q4, closing the year with $532.8 million. The sale of their insurance company and restructuring of securities are poised to have a lasting positive impact on margins and capital performance. The bank strategically reinvested some proceeds into higher-yielding securities and arrayed the rest towards reducing costly broker deposits. Consequently, they are expecting an enhancement of net interest income by over $120 million annually.
Growth narratives continued with loans expanding by over 7% year-on-year and deposits increasing by approximately $625 million. This expansion resulted in a net interest margin uplift to 3.04% for Q4, a signal of efficient asset and liability management. Further, executives expect the margin and net interest income to see more improvement, riding on the back of Q4's restructuring moves.
The bank ended Q4 with a net interest income of $335 million, a modest uptick from the previous quarter alongside an improved yield on net loans and investments. Adjusted noninterest revenue stood at $73.1 million, down from Q3 due to a revaluation of mortgage servicing rights and a dip in service charge fee income, the latter influencing a projected annual fee decline of $3 million in 2024. Adjusted noninterest expenses rose to $269.8 million; while efficiencies brought payroll costs down, other operational expense lines saw increases due to seasonal trends and investments in technology and products.
Cadence Bank's credit quality remained solid, with a year-end allowance coverage of 1.44%. Net charge-offs were within expectations, and there are signs that credit metrics may be stabilizing. Capital ratios improved significantly, reflecting a 27% improvement in tangible common equity to tangible assets. All of these bolster the bank’s flexibility and strength in capital management and set the stage for expected positive performance in 2024.
For the upcoming year, the bank is guiding for mid-single-digit revenue growth. While current forecasts are based on the forward curve, which includes rate cuts, the guidance is crafted with a conservative view, assuming a scenario closer to neutrality in terms of asset sensitivity. Should interest rates remain stable or decline more slowly than predicted, the bank anticipates a further positive impact on net interest income. For Q1, an improvement double that of the last quarter's net interest margin pace is expected, signaling confidence in an upward trajectory for 2024.
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Good day, and welcome to the Cadence Bank Fourth Quarter 2023 Webcast and Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I'd now like to turn the conference over to Will Fisackerly, Director of Finance. Please go ahead.
Good morning, and thank you for joining the Cadence Bank Fourth Quarter 2023 Earnings Conference Call. We have members from our executive management team here with us this morning: Dan Rollins; Chris Bagley, Valerie Toalson, Hank Holmes and Billy Braddock. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our Investor Relations page at ir.cadencebank.com, where you'll find them on the link to our webcast, or you can view them at the exhibit to the 8-K that we filed yesterday afternoon. These slides are also in the Presentations section of our Investor Relations website.
I would remind you that the presentation, along with our earnings release, contain our customary disclosures around forward-looking statements and any non-GAAP metrics that may be discussed. The disclosures regarding forward-looking statements contained in those documents apply to our presentation today.
And now I'll turn to Dan for his opening comments.
Good morning. We appreciate your interest in Cadence Bank. I will make a few comments regarding both our fourth quarter and full year 2023 results, and then Valerie will dive into the financials in more detail. Our executive management team will be available for questions following our remarks.
Oh, what a year 2023 was for our industry and specifically for our company. I'm extremely proud of our team's efforts throughout the year. We came into 2023 focused on improving our performance. And as we look into 2024, our goal is to build upon our accomplishments in 2023.
Looking back, we set out to improve our capital ratios, improve our portfolio yield, lower our efficiency ratio by lowering our expenses and, after March, enhance our liquidity. As we review our results, you will hear about significant progress in all of these measures, which certainly sets the stage for our continued improvement this year and beyond.
As we look at strategic accomplishments, we completed the closure of 35 branches in the third quarter. We completed our voluntary retirement program in the fourth quarter, lowering our headcount, including the branch closures and excluding the sale of Cadence Insurance, by almost 500 from the beginning of the year.
Finally, we unlocked the extraordinary value of Cadence Insurance. This transaction, completed in November, generated additional capital for our company of approximately $620 million, including an after-tax gain of $520 million. During December, we leveraged just over half of that gain to restructure over 25% of our available-for-sale securities portfolio, allowing us to reinvest the proceeds at much higher yields and reduce wholesale deposits, all while meaningfully increasing our tangible book value and capital ratios. Valerie will give more color in a moment on these restructuring transactions, but I'm excited about the significant positive impact this will have on our margin and core operating performance going forward.
And looking specifically at our financial results for the quarter, it's important to note that our financials are now broken out between continuing and discontinued operations. The results of our insurance business prior to the sale and the related gain from the sale are included in discontinued operations. Continuing operations includes all other financial results for the bank, including the loss on securities restructure. For comparative purposes, we will focus on adjusted continuing operations results, which excludes the loss of the securities restructure as well as certain other nonroutine items consistent with our past practice. Valerie will, of course, provide more detail on these items in her comments in a moment.
We reported GAAP net income, which includes both continued and discontinued operations, for the fourth quarter of $256.7 million, or $1.41 per common share, which results in annual net income of $532.8 million, or $2.92 per common share. We reported adjusted net income from continuing operations for the fourth quarter of $72.7 million, or $0.40 per common share, bringing annual adjusted net income from continuing operations to $401.2 million, or $2.20 per common share.
From a balance sheet perspective, loan balances grew $2.1 billion, or over 7%, for the year and were flat for the quarter. Our loan growth for the year was dispersed across our geographic footprint as well as the various loan types, primarily within corporate and mortgage.
Looking into 2024, I am confident our team of bankers will be able to win business and grow our balance sheet now that the economic stresses of ‘23 are in the rearview mirror and the economy within our footprint remains relatively strong.
We had another nice quarter from a deposit growth perspective, demonstrating the strength of our community banking business, with total deposits increasing over $160 million. Excluding the planned and continued reduction in broker deposits, we reported growth of $625 million, or 6.5% annualized. About half of this growth came from core customer deposit growth with the remainder driven by seasonal increases in public fund balances. For the full year, core deposits were essentially flat, while growth in the community bank deposits of $1.2 billion, or just over 4%, offset the decline in corporate and public fund balances. I'm confident our teams will be able to build on the momentum we experienced in the latter half of 2023. This balance sheet activity contributed to an increase in our net interest margin to 3.04% for the fourth quarter.
Valerie will dive further into the details, but our earning assets, both loans and securities, continue to reprice up. In addition, pressure on deposit costs has slowed as has the migration from noninterest to interest-bearing products. The securities repositioning obviously accelerates our margin improvement efforts. Given the December timing of our bond restructure, we anticipate additional positive impact from this repositioning in the first quarter margin.
Moving on to credit, our total criticized loans remained stable for another quarter at 2.09% of net loans and leases for the quarter. We did experience the negative migration of a handful of credits within our previously criticized population that drove the increase in nonperforming assets. This migration is reflected in an increase in credit provision to $38 million for the fourth quarter. Net charge-offs were 22 basis points for the year, in line with our expectations, and our allowance coverage ended the year at a healthy 1.44% of loans.
Finally, our capital metrics improved significantly as a net result of the insurance and securities transactions. CET1 was 11.6% at year-end and total capital was 14.3%, both of which improved over 130 basis points compared to the third quarter of '23. This improvement provides us with tremendous flexibility with respect to capital management and deployment in 2024 and beyond.
I will now turn the call over to Valerie for her comments. Valerie?
Thank you, Dan. I recall we promised you a noisy quarter, and I think we outperformed there. But when you break it all down, we believe this was a transformative quarter in setting the stage for positive momentum into 2024.
Dan described the continued and discontinued operations dynamics. We added a few slides this quarter to reconcile our GAAP earnings that combines everything to our adjusted earnings from continuing operations. Slide 5 includes these items for the full year. Slides 7 and 8 include both the current and prior quarters as well as major variances.
I will focus most of my comments this morning on the adjusted continuing operations fourth quarter results of $73 million in net income available to common, or $0.40 per share. On a pretax basis, these adjusted results exclude the $385 million loss on securities restructure as well as about $60 million in nonroutine expense items as we wrapped up some of the key activities Dan commented on. These routine expenses included a $12 million pension settlement charge driven by the early retirements, $7.5 million in incremental merger-related expense, legal expense, and $36 million for the industry-wide FDIC special assessment. The bottom of Slide 8 highlights a few additional variances that I will touch on as we move through the financials.
Before we dive into the details, I would like to take a minute to summarize and add a little more color around the strategic transactions executed in the fourth quarter. To summarize, first was the sale of the insurance company on November 30, enhancing capital by $620 million. We then leveraged that gain by selling $3.1 billion in par value available for sale securities during December at an after-tax loss of $294 million. These securities, a mix of mortgage-backed agencies and municipal bonds, were yielding 1.26% with an average duration of just over 4 years. As of year-end, we have reinvested $1 billion of the $2.7 billion in sale proceeds in securities yielding an average 5.6% with a duration of approximately 2 years. Another $645 million was used to lower year-end broker deposits that were costing us 5.47% with another $235 million at 5.4% reduced in January. The remaining proceeds are temporarily in cash at the Fed earning 5.4%, and we anticipate investing a portion of that in securities in the first quarter.
Finally, we were able to refinance the $3.5 billion bank term funding program borrowings from 5.15% to 4.84% and actually 4.76% as of today. As a reminder, this funding can be repaid at any time without penalty. So, the combined effect of all of these fourth quarter efforts, using static rates, is an estimated annual incremental positive impact on net interest income of over $120 million and, combined with the fourth quarter results, resulted in an increase in common equity Tier 1 of 130 basis points and an improvement in tangible book value per share of 28%, all in all, great results that will benefit us in years to come.
Moving on to the detailed financials for the quarter, beginning on Slide 16, we reported net interest income of $335 million for the fourth quarter, an increase of $5.6 million compared to the prior quarter. Our net interest margin was 3.04% for the fourth quarter, up 6 basis points. Our total cost of deposits increased at the slowest pace all year, up 18 basis points to 2.32%, as reflected on Slide 17.
Noninterest-bearing deposit balances ended the year at 24% of total deposits, down just slightly from 25.2% at the end of the third quarter. Given the yield curve forecast in 2024, we expect pressure on deposit pricing to improve as we move through the year.
Our yield on net loans, excluding accretion, was 6.43% for the fourth quarter, up 12 basis points from the prior quarter, reflective of new and renewed loans coming on the balance sheet at higher yields than the portfolio.
Finally, our securities and short-term investment yield was up 41 basis points to 2.96% in the fourth quarter due to the restructuring activity in December. Given the late fourth quarter timing of that activity, we anticipate net interest margin and net interest income to further improve in the first quarter as well as throughout 2024.
Noninterest revenue, highlighted on Slide 19, was $73.1 million on an adjusted basis, which excludes the restructuring securities loss, compared to $80.6 million for the third quarter. The decline was driven by 2 items: one, a negative variance on our mortgage servicing rights valuation of $4.9 million; and two, an $8 million reduction in service charge fee income in the fourth quarter as a result of certain deposit service charge changes. These changes are expected to result in a decline in fees of approximately $3 million annually in 2024. Aside from these 2 items, all other fee revenue increased about $5.5 million, including wealth management, card fees and other categories. Looking forward, we anticipate total revenue to increase at a mid-single-digit growth rate for 2024.
Moving on to expenses highlighted on Slides 20 and 21, total adjusted noninterest expense was $269.8 million for the quarter, reflecting a linked quarter increase of $5.6 million. As expected, salaries and employee benefits declined $5.7 million compared to the third quarter due to the efficiency work done in 2023. This decline was offset by increases in several other line items, including advertising and public relations, which increased $1.9 million, in line with typical fourth quarter seasonal increases. Legal increased $2.6 million, driven by an accrual related to the settlement of a legal matter. And finally, data processing and software increased $3.9 million, primarily the result of continued focus on our products, service and technology as well as inflationary increases in certain vendor costs with a smaller portion being timing. As we commented last quarter, we continue to anticipate flat operating expenses for the full year 2024 compared to 2023 adjusted results.
Finally, let's take a look at credit quality on Slides 14 and 15. Importantly, our criticized and classified loan totals continue to remain stable with the criticized total declining to 2.6% of loans and classified totals remaining flat at 2.09% linked quarter. Other credit metrics this quarter, including increased provision, net charge-offs and nonperforming totals were the result of some further deterioration in a small number of credits that were identified as criticized or impaired in prior quarters. Our nonperforming loans and nonperforming asset totals increased linked quarter to 0.67% of loans and 0.45% of assets, respectively. The provision for the quarter was $38 million, bringing our allowance coverage to a solid 1.44% at year-end. Net charge-offs declined in the fourth quarter to $24 million, or 29 basis points of average loans on an annualized basis, resulting in the full year net charge-offs of 22 basis points.
While certain of our credit metrics for the quarter increased, our processes to timely identify issues continue to work well and there are indications that macroenvironmental factors may be stabilizing or improving. As we look forward, based on what we see now, we'd expect our 2024 net charge-offs to be within a range relatively comparable to 2023 full year totals.
Our capital is shown on Slide 22, and as Dan noted previously, the ratios all improved meaningfully, providing us strength and flexibility from a capital management standpoint. Tangible common equity to tangible assets also improved 27% to 7.44% at year-end.
There were a lot of moving parts in the fourth quarter and in all of 2023 for that matter, but all for the benefit of driving future momentum and enhancing shareholder value as we look forward. Looking back, it was just over a year ago that we converted the systems and merged the brands of BancorpSouth and Cadence Bank into one. Since then, we have further integrated our teams and technology, meaningfully refined our branch network and staffing levels, completed a transformative sale of our insurance company, executed a highly profitable restructuring of our securities portfolio, materially improved our capital and liquidity and, importantly, expanded our loans and core customer deposits. We spoke to some of our expectations for 2024, and we have also laid those out for you on Slide 4. We are energized and focused and remain excited about the future of Cadence Bank.
Operator, we would like to open the call to questions, please.
[Operator Instructions] Today's first question comes from Catherine Mealor with KBW.
I want to start on your revenue guide, Valerie, that you talked -- you said was kind of mid-single digit, and you have in your slides is 4% to 6%. I noticed, in the slide, you say that you're following the forward curve with that. And so just curious, within that, expectations of revenue growth, how much does -- number one, I'm assuming the forward curve includes 6 cuts this year. And so then, within that...
It does.
How much -- okay. And so then how much of that is influencing some of that revenue growth guide? And then if we're actually in a scenario where we get less cuts, what would perhaps be the sensitivity to that growth?
We've said for a long time, we like higher for longer. And certainly, the pace of the cuts and the number of cuts is higher than we would like, but we model off the forward curve.
Yes, that's just something that we've always chosen to do because there's so many different variations out there, particularly lately. And doing the forward curve allows us to be consistent and hopefully, you guys can understand better what we're doing.
But to your question, we are slightly asset sensitive, but we're actually closer to neutral now than we've really been in quite some time. Plus 100 on a shock basis, it's plus 0.7%. That being said, if rates don't decline, if they were to stay right where they were, it would impact our net interest income positively by the range of, say, $16 million, give or take a few million. So it would be positive for us on the net interest income side if rates were to move slower perhaps than [ others have ].
Than other stuff.
Right.
Slower, not as far.
That's great. Okay. That's helpful. And then any -- I know the margin has so many moving parts. But as you kind of think about where we are going into the first quarter, do you have any kind of range that you can give us on where you think we're going to be starting the margin? I know you said up, but you had a big bond restructure and you've still got loans repricing up. So just kind of curious if you could help us get a starting point for the margin in the first quarter.
Yes. No, definitely, we're positive not only about the first quarter but really as we look out throughout the rest of next year. For the fourth quarter, net interest margin improved 6 basis points, and I'd say that was back-end loaded. So, for the first quarter, we would expect double to double plus of that rate of improvement in both the net interest margin and net interest income.
Okay. So at least another 12 bps in the first quarter, and we'll just see.
I think that's a reasonable expectation, yes.
And our next question comes from Stephen Scouten with Piper Sandler.
Just one clarifying question around the feed. How do we think about this service charge, the $3 million reduction and the $8 million charge this quarter? I mean, are we working off a $16 million, $17 million a quarter number, or do you think about it on an annual basis?
The $3 million reduction is an annual number. The $8 million is a onetime reduction from last year as we cleaned up and worked through the issues we need to deal with. But the forward look was $3 million on an annualized basis, lower fees.
Okay. So kind of take the $62 million for the year...
[indiscernible]
...and think about $3 million less?
Yes, Stephen, that wouldn't be off of the $8 million reduction. $8 million is really kind of an isolated item on its own.
Right, right. Got it. Perfect. Great.
To be more direct, add the $8 million back and then subtract $3 million.
Yes. Yes. Understood. Okay. And then just kind of thinking about the benefit that could come throughout the year on the deposit side, are there any large CD maturities or otherwise that we should be aware of that will kind of help expedite some of that improvement that we might see when rates do decline?
Yes, so we do have a solid pace of CD maturities coming, particularly in the first half of the year as well as in the third. Looking just at next quarter, we've got about $2 billion of CDs that are maturing.
Remember, the biggest product that we're pushing in the field is an 8-month product, and so they roll pretty fast.
Yes. That's right. That's right. And so a portion of those, we still have a promotional rate out there for CDs, but then a large portion of those also just roll over into some of that kind of real routine levels. So as you look at the year, we do anticipate some average improvement from those CD rollovers.
Great. And then just last thing for me. I'm curious about the share repurchase. Obviously, you’ve built capital extremely nicely with the insurance sale. Just kind of how you think about that moving forward, if it's kind of a total payout percentage you think about, if it's opportunistic or just the kind of potential thoughts around capital return?
Yes, in the past, we have used that in an opportunistic way. I think, as we look at where we sit with capital today, I think we've got all the tools in the toolkit, and we're ready to use all of them. So I think we feel really good about what we did in the fourth quarter from a capital standpoint, and it lets us execute however we want to go in 2024 and beyond.
And our next question comes from Casey Haire with Jefferies.
So a couple of NIM questions. Dan, you mentioned -- so you model towards the forward curve. Just wondering where you expect the cume beta to peak versus that 41% level, and then, when you do get these cuts, what kind of beta you have for '24 when rates are declining.
Yes, so our total deposit beta right now for the fourth quarter was 41% as compared to 38% last quarter. We actually -- because of the forward curve, those rate cuts in the modeling began in March. We actually have deposit costs peaking in the first quarter of next year before coming back down. And so, from a beta perspective, I don't have a specific number for you, but just very slightly, we saw deposit costs, like I said, increase at the lowest pace this fourth quarter, and we would expect that pace to further decline a little bit in the first quarter as well.
Got you. Okay. And I appreciate the guide on the first quarter NIM up double digits at least. But just can you guys provide just the spot securities yield and borrowing rate just so we have a better starting point?
Borrowing rates are -- we're borrowing today in the bank term loan fund, if that's what you're asking about. I think that's what you're asking about.
Yes, yes, yes. So I think you said -- so that goes to $480 million and then the securities yield, the spot securities yield, at 12/31?
Yes. So at 12/31, I think that the overall securities book is close to $260 million, given where the changes are.
Okay. Great. And just last one, so Slide 18 is great. You guys mentioned -- so it looks like the real opportunity is that you’ve got a little less $9 billion of fixed rate loans with a 4.60% weighted average yield. How much of that matures this year? And then within your bond book, you got $1.3 billion coming back at you. Do you have the weighted average yield for that? Just trying to get a sense on the fixed asset repricing tailwinds you have for the margin this year.
Yes. So on the bond book, we don't have a weighted average yield because part of that is cash flow off of some of the longer-term ones. So I would just really factor in -- just kind of think about the overall security field as a whole. It’s probably not going to get you too far off on some of those.
And then on your loan question, some of those are maturities. Some of those are simply repricing. They're actually combined in there. But obviously, as we generate new loans that offset some of those changes, those are coming on at higher rates as well.
Okay. But no color as to how much of that $9 billion comes this year?
When you -- I guess I'm confused.
So, on the floating rates, yes, if you take a look at -- on Slide 18, the very first 2 columns are basically the repricing within the first year. So, we've got 49% of our total loans that actually reprice within the next year. Is that what your question is? Sorry, I [indiscernible].
Yes, I'm actually looking -- if you look all the way to the right, it looks like, to your point, like, the 3 months or less is 8.29%. That's pretty much at market rates, and the 6.20% is - but the real opportunity is the 4.62% all the way over to the right, which is about $9 billion right? And I'm just wondering how much of that $9 billion comes -- reprices or matures within '24?
Yes. Got you. It's probably close to $1 billion, give or take a little bit of that that's actually maturing this year. But that doesn't reflect early payoffs, refinancing, anything like that. So it's always higher than that.
And our next question comes from Manan Gosalia with Morgan Stanley.
I wanted to start on credit. Your guide for 2024 implies essentially flat NCOs versus 2023. I guess you're seeing limited signs of new credit deterioration. Can you expand a little bit on that? And what part of that includes an improvement in credit once the Fed cuts rates versus is there any deterioration that could still come through in credit if you only get 3 or 4 rate cuts here?
This is Billy. So what we've seen over the last several quarters is just a nice, stable, manageable level of our criticized portfolio from a percentage standpoint. The population has turned a little, but I would say the bulk of that population has remained in that criticized category. So, as we see improvement, I would anticipate that there's favorable pressure towards the later half of the year if that improvement comes. But what we're assuming for now is that that stability remains. We keep our processes capturing the bulk of the portfolio that has been identified over the last several quarters. The deterioration that we have seen has been within that population. It's just a handful of corporate credits, so nothing real -- very idiosyncratic, independent name-basis deterioration. But I would expect to stay manageable within this level, but slightly down as the year goes like we've seen since Q1 of ‘23.
Got it. So does that also mean that the ACL ratio goes down from here as some of those charge-offs come through and you don't see too much additional deterioration?
Under those assumptions, I would say, yes, that's an accurate statement.
Got it. Okay. And then just separately on the capital side, just as a follow-up, now that we have more clarity on the trajectory for rates as well as macroeconomic outlook, do you have a target of where you'd like to maintain that CET1 ratio? I mean, it seems clear that it should move lower from here, but how much lower?
Yes, we don't have a CET1 target that's out there. We agree with you. The CET1 is healthy today. And again, we're hoping that we have clarity on rates, but I would like for them not to do what the forward curve says. I'd like for them to stay a little more stable.
And our next question comes from Brett Rabatin with Hovde Group.
I wanted to ask on the balance sheet, the $1 billion that you have remaining to reinvest, maybe, Valerie, kind of how you think about that $1 billion or what you're looking for from a duration and yield perspective? And then just, Dan or Valerie, any thoughts on replacing the $3.5 billion with the bank term funding program, what you might do to replace that?
I'll start with that one. I think we're really proud of what we've been able to do from a deposit growth perspective in the community bank over the last couple of quarters, and we've challenged the team to continue doing that. So if we can continue to grow those core customer deposits that are out there, that will allow us to continue to reduce wholesale funding.
Yes, the -- I'm sorry. What was your other question?
Yes, what was the first question?
The remaining $1 billion.
Okay. We got distracted. There is about $1 billion left of that. We'll probably do a little bit more in purchases and securities in the first half. We've been able to average [ 5% ] to [ 6% ] or so, given where rates are right now. You know that's probably not an unrealistic expectation for some of that. The other half, say, give or take, is really -- it could be in securities. It could be in various funding. The first quarter has a little bit of volatility with some of our public fund deposits. It could be lowering some of that bank term funding program. Borrowings, we’re really kind of playing it by ear on what the balance sheet does and what's going to make the most benefit for us from a yield perspective.
Okay. And then secondly, on the NPAs and the formation, I heard Billy earlier. So I’m just going to presume -- it seems like credit is fairly stable, but there's been some migration through criticized to nonperforming. And my question is, is there anything that's underlying that? Is it in health care, which is my guess, but are there any other industries that might be moving through the pipeline, so to speak?
Yes, I think the criticized has been basically flat now for multiple quarters. I think, you go back to 3/31, it was actually higher than we are today on criticized. So from that perspective, it's been really stable. It's very well spread across multiple industries, multiple geographies.
It is. The one area-- and we've highlighted this for several quarters -- and again, it's a couple of credits. We're not talking about widespread, but I would say restaurant is something that continues to have some follow-through impact. It's not any specific brands. It's not any specific geography. Like I said, those are interesting credit cases, but they are that industry. Otherwise, the other industry that we've seen some is kind of senior living. If that's what you mean by health care, then that's the one piece of health care where I would agree. Otherwise, in health care, we're seeing pretty much stability.
Yes.
Okay. If I could sneak in one last one maybe, Valerie, just on the [ DDA ] balances and average size of commercial and consumer checking accounts. Are those getting to levels where you think the drain of those accounts is not going to impact the balance sizes as much from here and maybe they stabilize to move higher with new customer creation?
We haven't seen a big change in average balance size.
Right. Yes, I think you're talking about noninterest-bearing deposits.
Right, right.
But I don't think a big change in average accounts.
Right, not in average accounts, but a little bit of movement between the two. Yes, so we've continued for 2 quarters in a row now. It's been kind of a consistent slower pace, about a 1% movement.
Our forecast, we do continue to be a little bit conservative in that. Our forecast has those noninterest-bearing to total deposits going down to 21% by the end of the year. But obviously, that's a big focus for our sales teams and our community banks, is to bring in those operating accounts and bring back some of those noninterest-bearing deposits that flowed out here in the -- they actually didn’t flow out. They flowed into higher-yielding products for the most part in 2023. So yes, there is some opportunity there.
That's really helpful.
And our next question today comes from Brandon King from Truist Securities.
So Valerie, on loan yields and betas, [ could ] you see a scenario where loan yields actually stay stable in the event of Fed rate cuts and just how you think about loan betas from here?
So yes, the loan beta, excluding accretion, went up to 46% in the quarter, down from -- or up from 44% in the prior quarter. As we look into next year, like I said, because we have -- we're forwarding -- or we're forecasting that forward rate curve, we likewise have that yield on our earning assets, which includes the loan, actually continue to improve slightly through the first half of next year before really kind of stabilizing off. And that's because of a couple of things. One, and significantly, is that level of repricing of loans as they're coming on the balance sheet that we showed that Slide 18 as well as, of course, the impact of loan growth being higher at higher yields than the overall portfolio. So that will continue to drive that up. Once there are some changes in the interest rate environment, there is a moderating impact on that. But on a net-net basis, we believe it's all going to be positive to the NIM.
Okay. And then with your loan growth expectations for the year, could you talk about what areas you're seeing the most opportunities and the strongest growth and kind of how your customers are starting to feel now that potentially you may be hitting a soft landing and if there's more optimism just as far as investing in their own businesses?
This is Chris. I'll kick it off. Our view is that it will be broad-based. We have great loan generating teams out there, and our view would be we can grow in all aspects, in all areas, in all geographies as we look forward. Especially if the rates do what they say they're going to do, that's going to generate some excitement and activity in the borrowing world.
Yes, I completely agree with Chris. This is Hank. One thing we have is the continued advancing in our CRE portfolio of multifamily construction loans. You'll see some modest growth there. And as the calendar changed into 2024 and we start reviewing pipelines, I'm pretty encouraged by what we're seeing. And it's pretty broad-based, as Chris mentioned. We're excited about the bankers that we have in place and our footprint, as Dan mentioned in the opening remarks. And so I’m full of optimism, definitely.
And our next question today comes from Joe Yanchunis with Raymond James.
So the $3.1 billion securities restructuring in the fourth quarter was a little bit larger than the $1.5 billion minimum that you kind of laid out when the sale was announced. What drove the decision to land on that number? And what are you buying with 2 years' duration at a 5.6% yield?
Good questions. I think when we look back at what happened to us -- so when we came out with our announcement of the sale of Cadence Insurance in November, we weren't sure where we were going to be at the time of the close. We weren't sure where rates were going to be. We were looking at what our opportunities were, and we gave you a minimum number in that presentation.
As we look forward, rates actually moved in our favor. And so as we were looking at what portion of that gain we could offset against a loss, we actually came in much lower on a loss than we thought we would, and that allowed us to do a larger portion of the bonds that have the low yield. So to be able to eliminate $3.1 billion at [ 1.26% ] return, we thought that was a good answer for us. What are we buying, Valerie, is the next question?
Yes, well, a variety of different products, front-end sequential, Ginnie Mae, CMOs, laddered treasuries, a few SBA floaters out there, but really some of the laddering product and, again, focusing on the duration that is shorter, focusing on products that ensure adequate cash flow. The cash flow is important to us coming off the securities portfolio, again, focusing on liquidity and flexibility with our loan growth [indiscernible] all the characteristics.
The restructure shortened duration, lowered risk weighting, improved cash flow.
It’s just a win every way you slice it.
No, absolutely. I appreciate that. Just a couple more for me here. So your loan and deposit guidance kind of implies your loan deposit ratio ticking up a little bit from the 84% level you're at at 12/31. What kind of range are you looking for, or what range would you be comfortable managing the balance sheet in that range?
Yes, we've said for a long time we're certainly comfortable where we are, and moving up towards 90% is very comfortable for us.
And then the last one for me...
[indiscernible].
Yes, it did. Within your revenue guidance, what's the split between net interest income and fee income growth?
Say that one more time.
What is the split between NII and fee income growth in your revenue guidance?
I don’t have that.
Yes, and really we didn't provide it that way just because of the variability between the two. But I mean, it's not going to be materially different on each category. Obviously, the net interest income is a much larger dollar amount. But from a percentage standpoint, it's within a couple of percentage points, I think.
I think, when you look at fees in '23 and '24, I mean, clearly, mortgage was hurt in a big way in '23. And if rates do fall, as they're talking, there's real opportunity there.
For sure.
Our next question today comes from Matt Olney from Stephens.
I heard the comments that you think that the balance sheet is now fairly neutral, but it seems like that restructuring and the build of overnight liquidity would result in increased asset sensitivity in the fourth quarter, but it sounds like you think it moderated. Any more color, you can help us appreciate kind of why you think that's more moderate now than last quarter?
Yes, it's really as we look out over the next 12 months. So I would say, yes, there is more sensitivity on the short end of that, but as you look out over the next 12 months, and really kind of in a normalized state, it's a little more neutral. So, we definitely have some upside with the cash in place right now.
Okay, so no other movements or migrations on the balance sheet beyond that restructuring that we've already covered?
No, nothing else of note.
And then on the deposit growth outlook, I think the guidance calls for the low single-digit growth. I would love to hear more about just expectations of where this could come from, which products? And any color on the incremental funding costs more recently?
Yes, funding cost was -- increased slower in the fourth quarter than it had been. When you look at that overall financial expectations page on Page 4, I think our desire was to put some confidence behind the consensus numbers that are out there today. We think that we're in good shape on that front. And specifically, the ability to grow deposits is a piece of that. I think that's the community bank team. It's certainly been growing on the interest-bearing deposit side. We continue to enhance and improve our treasury management product, and so I know the team is out there winning some business on that front. This morning, in the loan discussion, there was a good customer coming in, in there. So I think we continue to feel really good about where we are.
The other thing of note there, Matt, is the deposits at the end of the year include just shy of $400 million of broker deposits. About half of that already came down in January. And so included in that growth number is a reduction of broker deposits.
For further reduction, yes.
Our next question today comes from Ben Gerlinger with Citi.
I was curious, just kind of a point of clarification really. So, in your guidance, does that assume the BTFP is static throughout the entire year? Because if I have you getting rid of it, there's some flex in the NII outlook.
Yes, I think that I guess that depends on what happens with rates. That's a fixed rate product. And so, if rates begin to fall, I don't know that we want to leave that out there in a fixed rate product. So I think there are some questions in there as to what happens and when it happens. Today, it's good price funding for us. If rates begin to drop as early as the curve says they are, then we could lose some of that advantage and you'd want to find other sources of funding that would change.
Yes, that's exactly right. And that's exactly what the model is assuming is that, once the rates become inopportune, that we would pay that down.
Okay, so it's a bit of a dynamic model on that one. . And then very philosophical in nature, Dan, I know you can't speak for other management teams, but what do you think the market is looking for, for M&A to start? Is it strictly just the political election outcome in December, or are you looking for some rate cuts? Why are we not seeing much M&A today?
Yes, I think that the politics is a piece of that. I think some clarity from the regulatory bodies on what they're looking for and some speed to get approval would be helpful. And so I think there's just some unknowns that are out there. I think there's -- the marks is still a question, but I think a lot of people talking, there's a lot of discussion going on. There's a lot of desire to continue to get bigger. There's a lot of -- there's a benefit from a scale perspective. Scale still plays. We're really proud of what we've been able to do over the last 2 years. We think we've got capacity. We think we've got ability. We know our team can play. I think the marks and the unknown regulatory questions are still holding things back.
Got you. That's fair. And then if I could sneak one in, if you did do M&A and you had all those question marks kind of answered, what would be kind of the wheelhouse for an opportune size?
Yes, I think we want to continue to be opportunistic. So I think we like our footprint. I don't know that we need to go outside of our existing footprint. We would like to continue to grow market share within the footprints we serve. We like the dynamic growth markets that we serve. So certainly, as you look at our footprint, the bigger markets that we're in, from Dallas, Houston, Austin, Atlanta, Nashville, Tampa, anywhere in those markets would be beneficial to us. But more market share within our existing footprint is a target for us. And clearly, it needs to be big enough to make a difference, so several billion dollars would be what you'd be wanting to get to, up.
Got you. That's helpful.
And our next question comes from Brody Preston with UBS.
Valerie, I just wanted to circle back. I think you said the spot yield on the securities book was 2.6%. And I guess, when I just kind of try to do the back-of-the-envelope math and back into kind of where it would be for the securities that you put on versus taken off, it kind of looks to me like it should be more in like the 2.85%-ish kind of range on a spot basis. And I'm getting this question from a few investors as well. What are we missing that's kind of making it more in the 2.6% range versus in the 2.80s%?
Yes, I'm not entirely sure and -- or the amount that you're considering. I mean we -- of that $2.7 billion net that we sold, we've reinvested $1 billion into securities. And so it's not the entire $2.7 billion. We used some of it to pay down broker deposits, et cetera. The number you say sounds a little high, so I'm not sure I'm quite tracking with you. We can go through it in more detail [indiscernible].
No, that's pretty granular to be able to get to here.
Okay. But 2.6% is a good number to work off for the spot rate then is what you're saying?
Yes, yes, I think that's pretty reasonable, yes.
Cool. And so I guess any -- if I consider kind of what you have in cash at the Fed at 5.4% versus anything incrementally that you might do on the securities front in terms of purchases, is a mild benefit to it, but it feels to me like any securities purchases from here might be more about ALCO than necessarily earnings accretion. Is that a fair kind of point?
I'm not sure I'm completely tracking with you. I mean, we definitely believe that there's some opportunity to further invest the cash that we have held and to further benefit our margin as we look forward.
I guess I'm saying that there's not that much of a difference between 5.6% and 5.4% and so the earnings pickup from redeploying [indiscernible].
Yes, yes. No, at this point, it's going to be incremental improvement. That's a fair point, absolutely.
Okay, thank you for that. And then, Dan, I wanted to ask you, just I think the head of the OCC had some comments and they put out an NPR on M&A yesterday. I know y’all aren't OCC regulated, but it feels like they're taking a little bit firmer of a stance in terms of vetting each individual transaction. When you consider future M&A, does that make you think about leaning one way versus the other in terms of acquiring an FDIC institution versus an OCC institution?
No, I don't know that I'm familiar enough with yesterday's guidance that you're talking about. But no, I don't really think there's a difference. The acquiring institution, that’s who has to make approval. So where it's coming from is usually not that impactful in the decision process. But I think getting some clarity, as I said a few minutes ago, getting some clarity on what process the regulators want to use to get approval faster is going to be really important. It's very damaging for both institutions inside of a merger when things delay. And if things go on and on and on, it's very difficult.
And probably let me come back , actually, on that security, I mean, the $250 million is not tax equivalent. I apologize about that. But actually, if you go back in and you get the tax equivalent adjustment, it's closer to $275 million.
Awesome. I appreciate that follow-up. The last one I had for you...
[indiscernible] you asking. That helps clarify.
The last one I had for you was just, if you're assuming a forward curve, I was hoping you might kind of give us some insight as to what you're assuming for your down deposit beta, either on an interest-bearing basis or a total basis within the guidance.
Yes, I don't have that forward beta available, but we do, like I said, show the deposit costs peaking in the first quarter and then starting to gradually come down. But simply given the redeployment of cash flows into loans, the loan growth, the loan repricings that we have, combined with, obviously, the securities repositioning, again, anticipating positive net interest margin quarterly throughout ‘24.
Yes. If you look back at 2023 and you look at the growth and the time deposits that have come in, the lion’s share of that, a huge majority of that, is 8 months. And so you can back into how fast that can roll off.
Our next question today comes from Gary Tenner with D.A. Davidson.
I had a couple of just balance sheet questions moving forward. Once you get through the additional reinvestment of the bond sale proceeds here in the first quarter, do you expect that, for the rest of the year, the securities book is pretty flat and you’re just reinvesting cash flows, or is there a number where that might trend to otherwise over the course of the year?
Yes, it really depends on the opportunities within loan growth and our deposit growth and kind of the pace of that. And so it may bounce around a little bit. I would say on a -- kind of as a floor and not a hard floor, but the 15% total asset range is probably a range that we would like to keep our securities portfolio to total assets just for pledging purposes, liquidity purposes, et cetera.
Great. And then the follow-up to that is, as you think about the BTFP repayment, whether it's sometime earlier in '24 or at the end of the year, I'm assuming part of that comes out of available cash. What's the kind of cash target level on your balance sheet even as we're thinking out to the end of the year into '25, some minimum on balance sheet cash liquidity?
Yes, that's changed after March of last year.
Yes. There's probably $1.5 billion or so that would be anticipated as kind of a base level. There's a lot of volatility in some of our customer activity and just maintaining a fairly stable level of cash is probably always going to be there to some extent. That being said, we do have more cash than that right now, and so there is opportunity as we look forward.
And large availability at the Federal Home Loan Bank, which is where we were funding prior to the BTFP.
Yes, absolutely.
[indiscernible]
We’re measuring it now a little below that target level time to time -- again, variable.
And our next question today comes from Jon Arfstrom with RBC Capital Markets.
I just had a few questions. Slide 20, you referenced the FTE being down by 125 in 4Q, excluding the sale. What's left to do there, Dan? And what do you think is the right efficiency level for the company going forward? Where do you want to be?
Yes, so ask that question one more time. I want to make sure I'm hearing you.
Yes. What's left to do on FTE and where are you adding, where are you trimming? And what do you think is the right efficiency level for the company going forward, efficiency ratio?
Well, clearly, the efficiency numbers came down with the sale of Insurance and with the 400 or 500 people less that came out of the system in 2023. We continue to look for opportunities to be more efficient. I think there's a lot of hand-to-hand combat that's going on, on efficiency today, whether that's technology investment that turns into efficiency, whether that's another move in restructuring to consolidate some areas where we can consolidate more together.
The headcount reduction from here probably is not anything to get excited about. I would anticipate that we would be hiring on the other side. So, we continue to invest in our franchise. We continue to look for people that can help us grow. And so, as we can reduce headcount in one place, that's coming back in another place. So, I don't know that there's a big drop in people from here. I think, when you're looking at the efficiency, we do believe we can continue to drive efficiency down.
And part of that is through revenue.
And Valerie, is the adjusted expense number from the fourth quarter -- is that a good jumping-off point for the first quarter?
Yes. Yes. Yes, I think that's right. Remember, the first quarter has all the FICA expense and the 401(k) matching and all those other things. But you can kind of see that trend in our path between the first and second quarter.
Yes, that's on Page 4.
I want to ask about Page 4 as well, but a quick one on Page 3. I'm not trying to be a smart Alec here, but what do you think that looks like in a year, Slide 3? Are there any big initiatives that you have out there, or do you feel like things will be relatively clean from here going forward?
I hope we're a lot cleaner in 2024 than we were. As Valerie said, we worked really hard to muddy the water up for you guys. We promised you noise and we outperformed on the noisiness of the quarter.
But there were a number of things. And I said it, Jon, that we converted just over a year ago. And we knew that there were a number of things that we could do, but we really needed to get past that step. And so this past year was really active on all that front. But to what Dan said, we're going to continue working on improving the performance, on driving the revenue, on making sure we're efficient. And so there are going to be things, incrementally, I'd say always. But from the the size of what we did this past year...
We won't have that.
I doubt that we'll have a comparable year this year.
Yes. I think as the team looks out at what we're working on from a strategic look forward, we've got a laundry list of items that we can continue to execute on, but none of them anywhere come close to what we've done in the past year.
And then last question for me on Slide 4, are 6 cuts good or bad for your outlook compared to 0 cuts? And I think I said in my note, okay quarter, but the outlook is a little bit better. And I guess my big-picture question is, when you think about this outlook, how confident are you in it? How much did you scrub this? And where are some of the bigger variables in some of the guidance items that you've laid out?
Yes, I think when we're looking at Page 4, you've asked several questions in there. I think, just the overall look of Page 4, we're pretty confident in where the Street has us with consensus earnings for 2024. We feel good about where we are on that front.
I think, from a rate cut perspective, no rate cut would be my preference in the process right now for 2024. That would be a big benefit for us. Higher for longer continues to be a benefit for us, continues to allow us to reprice loans at the top. That's a win for us. Valerie?
No, I think you said it well. I mean, there's obviously moving parts in all the different pieces. The higher for longer is definitely better on the net interest income side. There's the question, what does that do? Could that be detrimental to some of the expense costs, et cetera? I'd say that's incremental, if anything. Overall, the ability to continue to reprice the loans at a higher rate is net-net beneficial.
Stability. Stability in our -- what you've been talking about, we moved through a lot of process changes, project changes, overhauls in this, that, and something else. And we did a lot in 2023. I think stability, stability in rates, stability in our operations, stability in what we're doing out there -- Hank talked about the team. We've got a fantastic team of bankers across our footprint who are winning business every day. And just being stable in what we're doing every day we think can turn into some real growth for us as a company.
Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for closing remarks.
All right. Thank you, again, everyone, for taking time to join us today. Once again, I am very proud of the progress that we made in '23. It's obvious the work our team put in during 2023 has laid the foundation for improved performance. We had a very nice year from organic growth -- loan growth perspective while also holding deposits very stable in a very competitive deposit environment.
And finally, the Insurance transaction and the subsequent securities portfolio restructure will further enhance our efforts to improve operating performance. While we are excited about the positive impact of these accomplishments, we are committed to continuing on our path to improve performance in 2024 and beyond.
Thank you all again for joining us today. We look forward to visiting with you soon.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.