Cadence Bank Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 25, 2023

There are 15 speakers on the call.

Operator

Good day, and welcome to the Cadence Bank Second Quarter 2023 Webcast and Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity Please note this event is being recorded. I would now like to turn the conference over to Will Fazackerly, Director of Corporate Finance. Please go ahead.

Speaker 1

Good morning and thank you for joining the Cadence Bank Second Quarter 2023 Earnings Conference Call. We have members from our executive management team here with us this morning, Dan Rollins, Chris Bagley, Valerie Tolleson, 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, 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.

Speaker 1

These 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.

Speaker 2

Good morning, everyone. Thanks for joining us today to discuss Cadence Bank's Q2 2023 financial results. I will provide a few highlights, then Valerie will review our financials in more detail. Following our prepared remarks, our executive management team will be available for questions. We reported quarterly net income available to common shareholders of $111,700,000 or $0.61 per diluted share.

Speaker 2

The adjusted net income available to common shareholders was $116,900,000 or $0.64 per diluted common share, With the primary difference being non routine expenses associated with our ongoing initiatives to improve efficiency, which I will discuss more in just a second. We had another strong quarter from a loan growth standpoint with net organic growth of $1,300,000,000 or 16.3 percent annualized. Year to date growth is now 2 point $2,000,000,000 or 14.7 percent annualized. Growth for the quarter was well distributed from a product and geographic perspective. Mortgage production was robust supported by 2nd quarter seasonality.

Speaker 2

Additionally, we saw continued fundings from CRE commitments We will continue to fund commitments in the coming quarters, but overall we expect the pace of loan growth to slow to an annualized mid single digit growth rate With most of the pressure coming from corporate accounts, some of the corporate declines are typical second quarter seasonality. However, this year, some of it is also driven by commercial Customers seeking yield. Community Bank deposit outflows were $130,000,000 in the quarter, while year to date growth for the Community Now stands at $347,000,000 Like many others, we felt the industry wide pressure on funding costs at a faster pace This quarter and saw the impact on our margin accordingly. Valerie will discuss this as well as our revised expectations and her margin comments As we look at a couple of our other highlights, our results reflect strong performance from our fee income Including record quarterly insurance commission revenue of nearly $46,000,000 We reported a meaningful increase in P and C commissions driven by business growth And retention as well as upward pressure on policy pricing. Finally, we continue to work aggressively towards improving our operating efficiency.

Speaker 2

We reported a decline of approximately $8,000,000 or 2.6 percent in linked quarter total adjusted non interest expense. We also refined our savings estimates related to the efficiency initiatives that we discussed in our Q1 call, including 35 branches that we expect to close within the next 30 days as well as various ongoing initiatives, including early retirements and other personnel savings. These initiatives are now projected to produce non interest expense reduce non interest expense by approximately $35,000,000 to $40,000,000 annually. The Majority of these actions associated with these initiatives will be implemented during the Q3 and we expect to reflect the full benefit by the Q1 of 2024. Valerie, I'll turn the call over to you.

Speaker 3

All right. Thank you, Dan. Looking at the results for the quarter, we see 4 broad themes, including key business development successes, stable credit quality, acceleration in funding costs and progress toward improved operating efficiency. Breaking down net interest revenue and margin on Slide 11, we reported net interest income of $334,000,000 for the 2nd quarter, A decline of approximately $21,000,000 compared to the Q1 of 2023. Of the decline, dollars 5,000,000 is related to lower accretion Compared to the Q1 with the remainder being driven by accelerated funding costs.

Speaker 3

Our net interest margin was 3.03% for the 2nd quarter, down 26 basis points from the linked quarter or 21 basis points excluding the decline in accretion. Our total Cost of deposits increased to 1.87 percent, up 59 basis points from last quarter. As you may recall, we added $1,900,000,000 in broker deposits in March of this year and maintained those balances in the 2nd quarter. Factoring out broker deposits, our core customer cost of deposits increased 45 basis points in the 2nd quarter as we continue to see migration from non interest bearing products to interest bearing. The percentage of non interest bearing to total deposits Declined from 29.2 percent at the end of the 1st quarter to 26.4% at the end of the 2nd quarter.

Speaker 3

Our yield on net loans excluding accretion was 6.18 percent for the 2nd quarter, up 31 basis points from the prior quarter. And at June 30, our total deposit beta was 35% cycle to date, while our loan beta, excluding accretion, was 44% cycle to date. Looking to the second half of the year, we currently anticipate our net interest income and our net interest margin to stabilize, Supported by continued loan growth and a slowing of both deposit outflows and the mix shift from non interest bearing to interest bearing. Additionally, we are forecasting a gradual increase in accumulative deposit beta to around the 40% level by the end of the year, with a cumulative loan beta excluding accretion increasing to the 50% level. Non interest revenue highlighted on Slide 14 was $132,300,000 Excluding the securities losses, Non interest revenue increased approximately $7,000,000 or 5.5 percent compared to the Q1.

Speaker 3

Insurance commission revenue increased $6,000,000 15% linked quarter. And impressively, insurance revenue has grown 14% compared to the Q2 of last year. Mortgage Banking revenue was relatively flat linked quarter with a decline in production and servicing revenue offset by improvement in the MSR asset valuation. The decline in other non interest revenue was largely the result of timing of elevated SBA and credit fees related to activity in the Q1 that we had earlier this year. Moving on to expenses, which are highlighted on Slides 1516.

Speaker 3

Total adjusted non interest expense declined $8,000,000 from $305,000,000 for the Q1 of 'twenty three to $297,000,000 for the 2nd quarter. The largest linked quarter decline on an adjusted basis was $4,800,000 in salaries and employee benefits, largely attributable to Seasonally higher payroll tax and retirement plan expenses in the Q1 of each year. Data processing and software expenses declined $3,900,000 on a late basis, including the result of savings associated with vendor contracts and service agreements. Finally, other miscellaneous expenses declined $3,600,000 As we look forward, Dan mentioned that we have updated the cost savings estimate associated with our strategic efficiency initiatives to $35,000,000 to $40,000,000 annually. The 35 branch closings will occur during the early part of Q3 And the early retirements and other personnel savings will be phased in over the course of the rest of 2023.

Speaker 3

We incurred non routine costs of $6,200,000 in the 2nd quarter associated with these initiatives, and we anticipate incurring an additional $10,000,000 to 12,000,000 over the remainder of the year. Factoring in these initiatives as well as our annual merit cycle increases that were effective on July 1st, We expect our quarterly adjusted non interest expenses to decline in each of the 3rd and 4th quarters. Finally, speaking to credit quality on Slide 9. Our provision for the quarter was $15,000,000 up slightly from the $10,000,000 provision in the Q1 of this year, primarily as a result of the loan growth we saw in the quarter. The $15,000,000 was made up of a $25,000,000 provision for funded loans, Partially offset by a $10,000,000 provision reversal on unfunded commitments.

Speaker 3

This dynamic is attributable to the continued funding of lines as The net charge offs were largely the result of a C and I credit that was identified as impaired and reserved for in a previous quarter. In addition, non performing loans and non performing We are pleased with the overall stability of our credit quality and while there are always a handful of issues being worked on, we've not seen indication of specific concentration or segment concerns. In summary, our results reflect a number of positives this quarter and there is a lot of momentum as we look forward. We expect stabilization in our net interest margin. CRC Business is continuing to perform well, and we are executing on various fronts to improve our operating efficiency.

Speaker 3

We also continue to have solid liquidity, credit and capital metrics, providing a strong foundation for our ongoing business growth. Operator, we would now like to open the call to questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Catherine Mealor with KBW, please go ahead.

Speaker 4

Thanks. Good morning.

Speaker 2

Good morning, Catherine.

Operator

I thought I wanted to start on

Speaker 4

the margin and Valerie, I found your commentary on your the updated beta is interesting, especially the loan beta that you're pointing to a 50% Cumulative beta as we end the year. And just curious, as you think about the loan repricing that you see in the back half of the year, I mean, we saw And so as you see deposit cost and maybe the mix shift stabilize, You're pointing to a stabilizing margin, but is it possible to even see the margin starting to increase? Maybe next quarter is Too soon, but as we're exiting 2023 and into 2024, just given your outlook for how you see loan yields repricing? Thanks.

Speaker 3

Thanks, Catherine. Great questions. First of all, I will say that what we are anticipating is one rate increase In the Q3 and then no more for the rest of 2024 or excuse me, for the rest of 2023 and then nothing really until the middle part of 2024. So that's really the foundation for these assumptions. To your question, yes, we've included the slide In our slide deck, it shows the loan pricing characteristics.

Speaker 3

And yes, those loans continue to reprice the loan growth that we've got. All of that is Fueling that loan yield to continue upward. That being said, it's all about the deposits. So could it improve as we go toward the end of the year? Absolutely, if deposits behave properly.

Speaker 3

That's exactly right. I think what we saw in the second quarter was a bit unusual for the whole industry. If we were to see another quarter like that, then that certainly wouldn't be the dynamic. What we are looking at based on some of the recent trends is the slowing, like I said, of some of the out of non interest bearing. Still expecting some continued migration, don't let me misstate that there, as well as some continued deposit runoff.

Speaker 3

But again, a somewhat slowing of those trends, so that's what's built into that stabilization comment. Got it.

Speaker 2

We can believe higher for longer It's better. Higher for longer can be better for us.

Speaker 4

Okay, great. And then in that, on the non interest bearing remix, What's your I mean, I know we just have no idea, but what's your best guess on where you think that bottoms as you just look at Your business mix and some of the trends you're seeing throughout the back, maybe especially the back half of the quarter as that stabilizes?

Speaker 3

Yes. So what we are actually modeling right now and projecting is by the end of the year being down to the 23%, 24% level Compared to the 26% level right now as a percent of total deposits. Depending on, And again, kind of what happens in the back half of the year, we could see that possibly going even a little bit lower into the early part of 'twenty four, But that's probably a little too early to call at this point.

Speaker 4

Got it. Okay. But if we blend together Cadence and Legacy Bancorp South Back in 2016, you were at about, I think about 26%. So just a little bit below maybe pre COVID levels on a combined basis, it feels like, but not drastically lower.

Speaker 3

That's based on some of the monthly trends and some of the recent activity and behavior that we're seeing That causes us to model it in that direction. Yes, that's exactly right.

Speaker 4

Okay. Okay, great. And then can you just give us a flavor for where New deposits are coming on today, maybe in your different products, CDs and money markets?

Speaker 2

Yes, most of the new deposits are coming on the CD on the high end. We're seeing a little bit of a win on Non interest bearing and some customer wins that we've picked up in a couple of places, but most of the dollars are flowing in on the interest bearing high end side.

Speaker 4

Okay, great. Thanks, Arun.

Speaker 5

I might

Speaker 6

just add a little color to that. I mean, we We are actively seeking the corporate deposits. We had indicated that there was some decline there. We were seeing some nice wins and some seasonality in Our legacy Kate folks had seen in the 1st couple of quarters, and I feel very good about where the pipelines are

Speaker 2

on the corporate side going forward.

Speaker 3

And I would just say from the fee promotional rates, those are to your point, Catherine, 5% to 5.25% is the pricing that we're seeing right now. Many markets Are probably in the 3.5% level.

Speaker 4

Great. Thank you. Thank you.

Speaker 2

Thanks, Catherine. Appreciate it.

Operator

Your next question comes from Michael Rose with Raymond James. Please go ahead.

Speaker 7

Hey, good morning, everyone. Thanks for good morning, Dan. Thanks everyone for taking my questions. Just a Follow-up question on deposits. I know the brokered deposits were down a little bit, linked quarter.

Speaker 7

What are the I have expectations for those balances as we move through the year. I'm just trying to get a sense for how much matures and what's kind of taken on in a short term nature in the depths of The failures in March. Thanks.

Speaker 3

Yes, sure. So yes, it did come down a little bit. We did, most of those are fairly short term, 3, 6, 9 months type of brokered CDs and brokered deposit arrangements. We do anticipate at this point really probably maintaining that level, At least in the foreseeable future, just with the deposit outflows in the industry, It's probably likely that we'll maintain those for a little bit longer than obviously we would have in the past.

Speaker 7

Okay. That's helpful. And then just to kind of backing up on Catherine's question And the guidance, it sounds like maybe a little bit more pressure on the NIM in the Q3 and maybe a little bit more pressure on NII, That should kind of stabilize the rebound in the Q4 and then you have a pretty big gap between the loan beta and deposit beta expectations even though Deposit betas rose from your prior expectations. Is that kind of just broadly speaking the way to read it, Valerie?

Speaker 3

I think as we look to the rest of the year, we think there's opportunity to stabilize the margin really throughout the last half of the year, Not just in the tail end of it.

Speaker 2

Expect the deposits behaving appropriately.

Speaker 7

Well, I did hear those sirens in the back, Dan, earlier. Maybe you guys got the cost after those depositors.

Speaker 2

That's right.

Speaker 7

But just Switching gears a little bit, just wanted to kind of square the circle on the incremental cost savings from some of the expense Initiatives, I think, you'd mentioned that you'd expect deposits down kind of 3rd and then into 4th quarter as a result You've kind of previously given a range of $290,000,000 to $300,000,000 but you have these extra cost savings. Obviously, you're doing some investing in the franchise as well. Is that still kind of a good range or would you potentially dip below kind of the $290,000,000 as we get into the Q4? Thanks.

Speaker 2

Yes, you've got a couple of things going on in this quarter and 3Q. Number 1 being the impact of annual Salary changes, we do that effective July 1. So that's an add to the 3rd quarter run rate There, but we also see the savings that are coming in. So I think the $35,000,000 to $40,000,000 that we're going to harvest out in back half of this year, you'll see all of that in the Q1. So that's a $10,000,000 a year $2,000,000 a quarter drop Off of the numbers that you see today, you're back into the investing.

Speaker 2

So you've got the upside. The only significant up that I'm aware of today would be The salary changes in 3Q. Valerie, you Yes.

Speaker 3

No, it's exactly right. And then on a GAAP basis, some of the one time costs, but We'll identify those quickly.

Speaker 7

All right, perfect. I'll step back. Thanks for taking my questions.

Speaker 2

Thanks, Mark.

Operator

Our next question comes from Manon Visalia with Morgan Stanley, please go ahead.

Speaker 8

Hi, good morning.

Speaker 2

Hey, good morning.

Speaker 8

I was looking to get some more color on just the level of conviction that NIM and NII should stabilize from here. Can you talk about the rate of change that you saw during the quarter? I think you just made a comment that Part of your guide was based on the more recent flows that you are seeing. And many of your peers have also noted that June was better than April May. So was wondering if that was something you saw as well?

Speaker 2

That's exactly right. April was the worst month of the quarter And we got better in May June and that's why you're seeing this model and have some confidence that we're stable.

Speaker 8

And what do you think drove that? Was it just improving customer behavior? Was it better management of liquidity? Or was it Just more conviction that the environment is improving. So you were able to price your deposit

Speaker 2

I think the customer behavior in April was all a result of the March madness in the banking industry and that's That's what we were dealing with in April and things have calmed down since then.

Speaker 8

Got it. Okay, perfect. We've

Speaker 3

just seen

Speaker 8

Yes, go

Speaker 5

ahead. A little bit more stability in the

Speaker 3

behavior of the outflows and the pricing as we've gone through the quarter.

Speaker 8

Got it. All right. Perfect. In terms of just cash and level of liquidity, I think last quarter you had said $1,000,000,000 or so of cash is a level that you're comfortable with. I think you're Around there with about $1,700,000,000 right now.

Speaker 8

So can you help us think through what the appropriate level of liquidity is? And also Maybe the rationale behind $1,200,000,000 of BTFP borrowings from this quarter?

Speaker 3

Sure. Yes, so we brought down our cash levels about 3 point 5 this quarter and that was really because of the excess cash that we put on at the end of the Q1 and just like the stability that we mentioned on the deposit front, Just really didn't see the need to maintain that excess liquidity. On the levels that we have right now, it's still probably a little higher than what I would Say it's a historical norm. And so over time, that may dwindle down, maybe another $500,000,000 or so. We're comfortable today.

Speaker 3

Yes, to a more normalized level, but we're comfortable where we are today. And then, yes, you're right, we actually did replace Some Federal Home Loan Bank borrowings with, a bank term funding program borrowing, about $3,500,000,000 there at a Rate that was lower than the Federal Home Loan Bank borrowing and we can pay it back at any point in time. So it was a net improvement for us On the margin and on our expense costs.

Speaker 8

Got it. So you just substituted part of The FHLB with BTFP.

Speaker 3

That's exactly right.

Speaker 8

All right. Perfect. Thank you.

Speaker 3

And save a little money to boot.

Speaker 2

Thank you. Appreciate it.

Operator

Our next question comes from Brandon King with Truist. Please go ahead.

Speaker 9

Hey, good morning. Hi, Brandon. Yes. So I wanted to touch on loan growth. Obviously, it's slowing the back half of the year, but could you give us some more Context behind what's driving slower loan growth and with the stronger seasonality of RESI, are you expecting RESI to be a bigger contributor in the back half

Speaker 10

of the year as well?

Speaker 2

Say that last part again, the strong

Speaker 3

Because resi was a strong contribution.

Speaker 2

Yes, yes, yes, yes, yes. Yes, 2nd quarter residential will drop back. Remember, the 3rd quarter will drop back from 2nd quarter. We expect to see that to drop in the secondary market is improving a little bit there. So the stabilization in rates is helping the secondary market.

Speaker 2

So that's what you're saying. On our side, we're but what's coming on the balance sheet is ARM product. That ARM product Hopefully, we'll be able to be moved into the secondary market more and more as the market picks up. From a slowing back half of the year, I think the industry as a whole and our process ourselves is saying much less coming through the pipeline, but lots of people are in the room here, Hank and Chris and Billy? I think you're exactly right.

Speaker 6

We've seen really a credit tightening within the industry, a real focus Making sure that we have clients that we benefit from both sides of the balance sheet. We're taking care of our clients, but at the same time, we are very Keenly focused on the deposit generation and what that looks like the second half of the year. But I think in general, you're just seeing an overall credit tightening within the industry.

Speaker 3

And I'd say as part of that, there's a little bit of tightening on the spreads that comes as part of And so by being able to be a little more selective, it allows us to do a little bit better on pricing.

Speaker 9

Got it. And what just follow-up on that, since the industry is tightening in general, Are there any is there any appetite to kind of take market share with higher credit spreads and kind of being more opportunistic in this sort of environment?

Speaker 2

We've told our team absolutely to be out talking to the customers that you've been wanting to bank for a long time. Where there's an opportunity to move over a customer that we've been wanting for a long time, we're absolutely open for business and have some successes in doing that, but we're being selective.

Speaker 3

To the lending that we're doing today. Yes, we

Speaker 2

need a full relationship. Absolutely.

Speaker 9

Yes. And just lastly for me, just given How the trends were better in the latter part of the quarter. How close was the June NIM to the average quarter NIM?

Speaker 3

We're probably not going to give specific items, but I mean it was like I said April was the biggest Deposit cost change that we saw on a percent basis and then that trended down throughout the rest of the quarter. And that's what gives us some of the projection basis that we have going forward.

Speaker 7

Okay. Thanks for taking my questions.

Speaker 9

Thank you, Brennan.

Operator

Our next question comes from Brody Preston with UBS. Please go ahead.

Speaker 5

Hey, good morning, everyone.

Speaker 2

Good morning.

Speaker 5

Valerie, I wanted to follow-up On the loan beta commentary, I was hoping maybe on the 3 to 12 month bucket That you guys given the deck, you got about $2,000,000,000 of loans that are repricing within the next 3 to 12 months. They have a 5.76 Loan yield, I guess, where does the loan yield go when those reprice in the current market?

Speaker 3

So what we saw in the past quarter was renewed loans coming in Somewhere in a quarter ish range, give or take, a few basis points depending on the type. And so that's a meaningful bump from what we see on there. Now that's going to have mix depending on what the product is. Loans Better mortgages obviously are lower than that. But that's what we saw in the new renewed loans that came on in the second quarter.

Speaker 5

Okay. So that would be like a 2 50 basis point pickup or so on 4% to 6% of the book by year end. I guess I'm just trying the 50% cumulative beta step up with only one more rate hike Seems to indicate some significant repricing for the book, I guess, maybe beyond what's in the 3 to 12 month bucket. So I was just trying to square those comments.

Speaker 2

Yes. It's higher for longer, continues to allow us to reprice assets forward that have not repriced yet. Yes.

Speaker 3

And combined with the loan growth We've been able to see even though it's slowing, that will still be a contributor to those data as well.

Speaker 5

Okay. And then on the non interest bearing commentary, that I think April was the worst, May June both improved. When you say improvement, do you mean the rate of change improved? Did you mean Dollars actually grew just because the average and the period end declines aren't too dissimilar. They're both 11% to 12%.

Speaker 5

And so I was just trying to make sure I understood. Was it June was just down less than April was?

Speaker 3

From the rate of change, yes, it was down less than April was.

Speaker 2

Yes, you said that right. Rate of change improvement. Yes.

Speaker 5

Got it. Okay. And within the margin commentary, how much I guess, is there any dependence on I think you said the $1,800,000,000 of brokered is going to maybe stick around, but that $1,200,000,000 of BTFP that you had on average, I guess how much is there any expectation for that to move lower Within that margin commentary?

Speaker 3

Really, that's going to depend on the rest of the balance sheet. We locked that in at rates in the Q2 that are going to be favorable as we go forward. We can maintain that for a little while. And so Just really kind of depending on where the rest of our balance sheet goes, we'll use that as a variable factor to potentially

Speaker 2

So you're quoting the quarterly average rate, the quarterly average balance on that and I'd be looking at the quarter end on that.

Speaker 3

Yes, quarter end was $3,500,000,000 and just over a 5% rate.

Speaker 5

Okay. Okay. So that full I guess the full $3,500,000,000 that I see at quarter end, is that all BTFP?

Speaker 3

Yes, that's right.

Speaker 8

Okay, thank

Speaker 5

you. All right. And then, I did just want to follow-up with just two last Questions just on the July 1, the merit based increases that you referenced. Can you give us a sense for what the I guess, what the dollar size amount is that of that is just so we can make sure we're modeling the quarterly variations given the all the moving parts The cost savings in that?

Speaker 3

Yes, it's $3,500,000 to $4,000,000 per quarter.

Speaker 5

Okay. Okay. And then the last one, was I was just trying to understand the nuances in the criticizing classified. I think the accounting change shifted a decent amount on the residential mortgages from substandard back To pass, maybe, but the commercial criticized classifieds went up by 17%. I guess, am I understanding the accounting change correctly?

Speaker 5

And then was there anything specific that drove the step up in the commercial criticizedclassified?

Speaker 11

I'll take a stab. This is Chris. The step up in the commercials, grade migration as we work through credits, Normal customary kind of grade migration. The change in the methodology was to adopt the regulatory guidance around The mortgage credits from a substandard and special mention perspective, so that's what moved those numbers. So most of that those dollars went from sub A special mention in the resi bucket.

Speaker 5

Got it. Thank you very much for taking the questions everyone. I appreciate it.

Speaker 2

Appreciate it. Thanks.

Operator

Our next question comes from Jon Arfstrom with RBC Capital Markets, please go ahead.

Speaker 12

Hey, thanks. Good morning, everyone. Can you help us understand what's going on in insurance? I know you mentioned, It seems like it's a little bit of a hard market, a little bit of new client acquisition, but up 14% year over year, I'm just looking for a little more color on that and what the outlook

Speaker 2

The team is doing a great job. As we've said before, we like that business. The team is doing a great job of growing our book of business and retaining customers. So our retention was really good in the quarter. Our new business was good in the quarter.

Speaker 2

And you Add on that, a hard insurance market where just like my home premium and my cars that went up in the quarter, everybody is paying more for insurance.

Speaker 11

A bit anecdotal, but I think just we're starting to develop synergies with commercial teams and the corporate bank too. So it's not a big move, but there's just a lot of energy in that space

Speaker 12

Okay. And outlook for that? I mean, it seems because to me that would be the driver, right? The new business, Not necessarily the hard market.

Speaker 2

Yes, the team is doing a great job. We continue to see ability to grow That revenue is frame and so the team is doing a great job of growing that. We've added some producers to the team here in the last couple of quarters. They're beginning to hit their stride. We've added So market to the team, there's activity going on there that

Speaker 12

will help us grow that business. Okay, good. Just a follow-up credit question. I don't know if it's for maybe Billy or Chris, but how do you guys want us

Speaker 2

to or Valerie, how do you

Speaker 12

want us to think Provision, I mean things do look pretty clean from a credit quality point of view, but curious how you want us to think Provision and if there's anything else out there on credit that you're watching more closely?

Speaker 2

I think you're right. I think we feel pretty good about credit, but You guys talk about provision, somebody.

Speaker 11

Yes, I'll kick it off. So obviously, we have a model. We follow our process. Barry's comments were on point. We're not seeing systemic large impact on any vertical or line of business or collateral segment.

Speaker 11

It's still kind of One off problem credits that we're working through. So from that perspective, we're not seeing any large moves From a credit perspective, Billy, Valerie?

Speaker 8

Yes. I mean, I don't

Speaker 10

know what else to say other than, I mean, John, you followed us for a long time. And we will see we regularly review all of our credits. Anything that gets impaired, we are early to impair. Some of those could get worse, some of those could get better, but the ones that get worse from a corporate standpoint are going We kind of lumpy and we've talked about that in the past. We had one of those this last quarter.

Speaker 10

That's what drove most of the charge offs. Some of that can continue, but I don't see anything systemic, I guess there's a better way to answer that.

Speaker 2

That help you?

Speaker 12

Yes, that helps. Okay, thanks. Appreciate it.

Speaker 2

Thank you, John.

Operator

Our next question comes from Matt Olney with Stephens.

Speaker 13

Just wanted to clarify some of the commentary on The cost savings in terms of what's incremental from what we discussed on the April call, I mean, I guess the number Branch closures are the same, but the early retirement and I think it was termed other target efficiencies, that sounds incremental. Any more commentary for us to appreciate kind of what's incremental on the cost savings plan since the April call?

Speaker 2

Yes, it's people. So the voluntary retirement program that we offered out is still ongoing and so we're working through all of that. But We expect to see headcount reduction and we expect to see some restructuring in some of the teams that we're doing to be more efficient and that will almost all of that's going to result in payroll cost

Speaker 13

Okay. Appreciate that. And then I guess thinking more about capital, I mean, we're seeing there your TCE ratio increase a little bit in 2Q. I'm sure it's not quite where you want to see it, but just Remind us how we think about or how you think about capital and as capital builds the back half of the year and the next year, at what Capital level, is there what are you targeting where we could talk more about deployment opportunities?

Speaker 2

Yes. Again, I don't know that in today's environment we have a specific target. I think you're coming around to Buyback program, I think we continue to have our buyback program in place.

Speaker 8

I

Speaker 2

don't think we'll execute on our buyback program in today's environment and at today's levels. We're growing capital and we've got great earnings coming through the pipeline, but we need to make sure that we're prepared for whatever comes our way from an economic standpoint.

Speaker 13

And going back to the loan growth commentary, you mentioned a significant part of the growth in 2Q is from Residential mortgage and some of those arms and you thought maybe you could potentially sell some of those in the back half of the year on your newer production if pricing improves. Are you seeing that yet in the back half of the year? Are you seeing an improved pricing? Or is that something you're just still waiting for?

Speaker 2

Yes. No, I think we've seen what's in the pipeline has moved more to secondary market product from on balance sheet products. So I think we feel like that will slow in the quarter just from what's in the pipeline that hasn't closed yet now.

Speaker 13

Okay. And just to clarify the commentary about loan growth slowing the back half of the year Your mid single digit guidance, how much of that is just selling more of the Moorish production versus a slowdown of just more on the commercial side?

Speaker 2

Yes. So let's make sure we're all saying the same thing. So we would continue to think that mortgage can grow through the back half of the year At a slower pace. So what we've seen over the last year is more of our mortgage production has come on balance sheet than has historically been the case for us. We were 70%, 65%, 70% plus secondary market production shop where we were selling things off in the secondary market.

Speaker 2

When rates started spiking up, the ARM product became very popular. The secondary market for ARM was dysfunctional and Still kind of is, but it's improving. And so now even though ARM is still popular, we're producing more ARM product that is secondary market going out. So the things we're closing now, more of that is going out into the secondary market than was before.

Speaker 3

And that was an increasing trend as we went through the Q2 and to Dan's point that we'll A little bit more in the Q3, but that's not what's driving The

Speaker 2

slowness. That's where I

Speaker 3

was going. That will be a part of it obviously, but

Speaker 2

That's where I was going, exactly. But not Yes, the whole pipeline has just slowed down. What we're seeing coming through the pipeline from Q1 to Q2 is Different than what's in the pipeline today is different.

Speaker 13

Okay. Okay. Thanks for clarifying. Appreciate it.

Speaker 2

Okay. Thanks.

Operator

Our next question comes from Brett Rabatin with Hovde Group. Please go ahead.

Speaker 14

Hey, good morning, everyone. Wanted to first see if you had the number for the unfunded commitment change linked quarter. I know you had the negative $10,000,000 provision Related to that?

Speaker 11

I don't have that number specifically other than it's down the other way. I I don't is anybody has that? We can get back to you on it. Yes.

Speaker 14

Okay.

Speaker 2

There was a whole lot of unfunded construction loans coming into the year And those loans are beginning to fund up and have been funding up throughout the 1st two quarters as a construction project finishes, it moves into CRE And out of the cab bucket, but it's also pulling off of the unfunded.

Speaker 14

Okay. And then wanted to make sure I understood, you have a really strong consumer deposit base. And I just wanted to make sure I understood The comment around the decline primarily in corporate accounts activity. Could you guys talk a little bit more about What you saw on the corporate side and just what that change meant for their for the cost of funds specifically on the corporate side?

Speaker 2

Yes. So what you heard me say was, we track ourselves off of our Community Bank team and our Corporate Bank team. The Community Bank team, As I said, it's done fairly well. Deposits are actually up year to date in the Community Bank. The corporate world, those treasures are looking for yield.

Speaker 2

And so we're seeing more and more people look for dollars. Mike, do you want to talk about that?

Speaker 5

Yes. So there

Speaker 6

are a couple of dynamics that happened in the 1st part of the year. First off, you get Taxes obviously and you also get bonuses that get paid and we have seen that over the last 10 years come down in the corporate world. There's some seasonality to it. There's also as rates have risen, the difference between paying 1% for a deposit versus paying 4 It's really eye opening from the CFO perspective. And so we're getting a lot more push to move those out of the DDA and into the interest And in addition, as we saw in March with some of the issues there, some of our clients also saw some Secure positions, seeking FDIC insurance or money market mutual funds that allowed us to move That moves from deposits out to reduce some of those larger depositors.

Speaker 6

We've seen some of that come back and some stabilization there. And I am hopeful and what we've seen historically see some of those corporate deposits rise in the second half of the year and offset some of that decline.

Speaker 14

Okay, that's helpful. And then just last quick one for me. I know the AOCI improved a little bit Linked quarter, and you guys, it sounded like you haven't been interested in doing any more restructuring of the securities portfolio. I was just curious if that mindset had changed at all and if you thought maybe that might be a use of capital here at some point in the back half?

Speaker 2

I think it all depends on where rates go and what's happening. I mean, I don't see us doing that today, but there's been stranger things that happened in the environment.

Speaker 3

We always try to take a look at the portfolio at changing interest rates and do what's best for the balance sheet.

Speaker 2

The team does a great job of tracking that and monitoring that for us.

Speaker 7

Okay, great. Appreciate all the color.

Speaker 2

Thank you very much, Brett.

Operator

This concludes our question and answer session. I would like to turn the conference

Speaker 2

All right. Thank you all again for your time for joining us today. I just want Repeat the 4 broad themes for the quarter that Valerie mentioned a few minutes ago, including key business development successes, stable credit quality, In closing, I'm excited about the future of Cadence Bank. I believe we are Navigating this part of the cycle from a position of strength, as evidenced by our quarter's result, our balance sheet is in a great position from a liquidity standpoint. We will continue to focus on expanding our core deposit base, maintaining strong credit quality, growing our fee businesses and taking advantage of the opportunities in front of us to improve operating Thanks again for joining us today.

Speaker 2

We look forward to visiting with you soon.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Cadence Bank Q2 2023
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