Cadence Bank Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 18 speakers on the call.

Operator

Good day, and welcome to the Cadence Bank 4th Quarter 2023 Webcast and Conference Call. Please note today's event is being recorded. I'd now like to turn the conference over

Speaker 1

to Will Fizachery, Director of Finance. Please go ahead. Good morning, and thank you for joining the Cadence Bank 4th 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, where you'll find them on the link to our webcast or you can view them at the exhibit at 8 ks that we filed yesterday afternoon.

Speaker 1

These slides are also in the presentation 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

Speaker 2

morning. We appreciate your interest in Cadence Bank. I will make a few comments regarding both our Q4 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.

Speaker 2

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 in the Q3.

Speaker 2

We completed our voluntary retirement program in the 4th 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 $620,000,000 including an after tax gain of $520,000,000 During December, we leveraged just over half of gain to restructure over 25% of our available for sale securities portfolio allowing us to reinvest the proceeds 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 quarter, it's important to note that our financials are now broken out between continuing and discontinued operations.

Speaker 2

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 non routine 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 Q4 of 250 of $532,800,000 or $2.92 per common share.

Speaker 2

We reported adjusted net income from continuing operations for the 4th of $72,700,000 or $0.40 per common share, bringing annual adjusted net income from continuing operations to $401,200,000 or $2.20 per common share. From a balance sheet perspective, Loan balances grew $2,100,000,000 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 2023 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 $160,000,000 Excluding the planned and continued reduction in brokered deposits, we reported growth of $625,000,000 or 6.5 percent annualized.

Speaker 2

About half of this growth came from core customer deposit growth with the remainder driven by seasonal increases and public fund balances. For the full year, core deposits were essentially flat, while growth in the community bank deposits of 1,200,000,000 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 twenty twenty three. This balance sheet activity contributed to an increase in our net interest margin to 3.04% for the 4th quarter. Valerie will dive further into the details, but our earning assets, both loans and securities continue to reprice up.

Speaker 2

In addition, Pressure on deposit cost has slowed as has the migration from non interest 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 quarter margin. Moving on to credit. Our total criticized loans remained stable another quarter at 2.09% of net loans and leases for the quarter.

Speaker 2

We did experience the negative migration of a handful of credits within our previously criticized population that drove the increase in non performing assets. This migration is reflected in an increase in credit provision to $38,000,000 for the 4th 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 percent 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 Q3 of 23.

Speaker 2

This improvement provides us with tremendous flexibility with respect to capital management and deployment in 2024 and beyond. I I'll now turn the call over to Valerie for her comments. Valerie?

Speaker 3

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.

Speaker 3

Slide 5 includes these items for the full year. Slide 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 operations 4th quarter results of $73,000,000 in net income available to common or $0.40 per share. On a pretax basis, these adjusted results exclude the $385,000,000 loss on securities restructure as well as about $60,000,000 in non routine expense items we wrapped up some of the key activities Dan commented on. These routine expenses included a $12,000,000 pension settlement charge driven by the early retirements, dollars 7,500,000 in incremental merger related expense, legal expense and $36,000,000 for the industry wide FDIC special assessment.

Speaker 3

The bottom of Slide 8 highlights a few additional variances that I will touch on 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 Q4. To summarize, first was the sale of the insurance company on November 30, enhancing capital by 6 $20,000,000 We then leveraged that gain by selling $3,100,000,000 in par value available to sales securities at an after tax loss of $294,000,000 These securities, a mix of mortgage backed agencies and municipal bonds We're yielding 1.26 percent with an average duration of just over 4 years. As of year end, We have reinvested $1,000,000,000 of the $2,700,000,000 in sale proceeds in securities yielding an average 5 point percent with the duration of approximately 2 years. Another $645,000,000 was used to lower year end brokered deposits that were costing us 5.47 percent with another $235,000,000 at 5.4% reduced in January.

Speaker 3

The remaining proceeds are temporarily in cash at the Fed earning 5.4 percent and we anticipate investing a portion of that in securities in the Q1. Finally, we were able to refinance the $3,500,000,000 bank term funding program borrowings from 5.15 percent to 4.84 percent and actually 4.76% as of today. As a reminder, this funding can be repaid at any time without penalty. The combined effect of all of these 4th quarter efforts using static rates is an estimated annual incremental positive impact net interest income of over $120,000,000 and combined with the 4th quarter results resulted in an increase in common 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.

Speaker 3

Moving on to the detailed financials for the quarter, Beginning on Slide 16, we reported net interest income of $335,000,000 for the 4th quarter, an increase of $5,600,000 compared to the prior quarter. Our net interest margin was 3.04 percent for the 4th 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. Non interest bearing deposit balances ended the year at 24% of total deposits, down just slightly from 25.2% at the end of the 3rd quarter. Given the yield curve forecast in 2024, we expect pressure on deposit pricing to improve as we move through the year.

Speaker 3

Our yield on net loans excluding accretion was 6.43 percent for the 4th 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 investments yield was up 41 basis points to 2.96% in the Q4 due to the restructuring activity in December. Given the late 4th quarter timing of that activity, we anticipate net interest and net interest income to further improve in the Q1 as well as throughout 2024. Non interest revenue highlighted on Slide was $73,100,000 on an adjusted basis, which excludes the restructuring securities loss compared to $80,600,000 for the 3rd quarter. The decline was driven by 2 items: 1, a negative variance on our mortgage servicing rights valuation of 4,900,000 and 2, an $8,000,000 reduction in service charge fee income in the 4th quarter as a result of certain deposit service charge changes.

Speaker 3

These changes are expected to result in a decline in fees of approximately $3,000,000 annually in 2024. Aside from these two items, all other fee revenue increased about $5,500,000 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 21, total adjusted non interest expense was $269,800,000 for the quarter, reflecting a linked quarter increase of $5,600,000 As expected, salaries and employee benefits declined $5,700,000 compared to the 3rd quarter due to the efficiency work done in 2023.

Speaker 3

This decline was offset by increases in several other line items, including advertising and public relations, which increased $1,900,000 in line with typical 4th seasonal increases. Legal increased $2,600,000 driven by an accrual related to the settlement of a legal matter. And finally, data processing and software increased $3,900,000 primarily the result of continued focus on our product, 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 flat operating expenses for the full year 2024 compared to 2023 adjusted results. Finally, let's take a look at credit quality on Slides 1415.

Speaker 3

Importantly, our criticized and classified loan totals continue to remain stable with the criticized total declining to 2.6 percent of loans and classified totals remaining flat at 2.09% linked quarter. Other credit metrics this quarter, including increased provision, net charge offs and non performing totals were the result of some further deterioration in small number of credits that were identified as criticized or impaired in prior quarters. Our non performing loans and non performing asset totals increased late quarter to 0.67 percent of loans and 0.45 percent of assets respectively. The provision for the quarter was $38,000,000 bringing our allowance coverage to a solid 1.44 percent at year end. Net charge offs declined in the 4th quarter to $24,000,000 or 29 basis points of average loans on an annualized basis resulting in the full year net charge offs of 22 basis points.

Speaker 3

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 macro environmental factors may be stabilizing or improving. As we look forward based 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 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 Q4 and in all of 2023 for that matter, but all for the benefit of driving We converted the systems and merged the brands of Bancorp South and Cadence Bank into 1.

Speaker 3

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 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. Thank

Operator

Today's first question comes from Catherine Mealor with KBW. Please go ahead.

Speaker 4

Thanks. Good morning.

Speaker 2

Good morning, Catherine.

Speaker 4

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 as 4% to 6%. I noticed in this 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 1, I'm assuming the forward curve includes 6 cuts this year. And so then within that, how much okay. And so then how much of that is influencing some of that revenue growth guide?

Speaker 4

And then if we're actually in a scenario where we get less cuts, What would perhaps be the sensitivity to that growth?

Speaker 2

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.

Speaker 3

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 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 is 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 $1,000,000 give or take a few million.

Speaker 3

So it would be positive for us on the net interest income side if rates were To move slower perhaps than And not as fast. Right.

Speaker 2

Yes, slower and not as far.

Speaker 4

That's great. Okay, that's helpful. And then any I know it's I know the margin has so many moving parts, but as you kind of think about Where we are going into the Q1, 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 I mean, 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 Q1?

Speaker 3

Yes. No, definitely we're positive not only about the Q1, but really as we look out throughout the rest of next year. For the Q4, net interest margin improved 6 basis points and I'd say that was back end loaded. So for the Q1, we would expect Double to double plus of that rate of improvement in both the net interest margin and net interest income.

Speaker 4

Okay. So at least another 12 bps in the Q1 and we'll just see.

Speaker 3

I think that's a reasonable expectation. Yes.

Speaker 4

Okay. Okay, great. All right. I'll pop out of the queue, but thanks so much. Appreciate it.

Speaker 5

Thanks, Jonathan. Thanks, Jonathan. Thanks, Jonathan. Thanks, Jonathan.

Operator

Our next question comes from Stephen Scouten with Piper Sandler. Please go ahead.

Speaker 5

Yes, thanks. Good morning, guys. Just one clarifying question around the fees. How do we think about this service charge, the $3,000,000 reduction the $8,000,000 charge this quarter. I mean, are we working off a $16,000,000 $17,000,000 quarter number Or you think about it on an annual basis?

Speaker 2

The $3,000,000 reduction is an annual number. The $8,000,000 is a one time reduction from last year as we cleaned up and worked through the issues we need to deal with. But the forward look was $3,000,000 on an annualized basis lower fees.

Speaker 5

Okay. So kind of take the $62,000,000 for the year and think about it $3,000,000 less?

Speaker 3

Yes, Stephen, that wouldn't be off of the $8,000,000 reduction. Dollars 8,000,000 is really kind of an isolated item on its own. Right.

Speaker 5

Got it. Perfect. Okay, great.

Speaker 2

Yes. Be more direct add the 8 back and then subtract 3.

Speaker 5

Yes, understood. Okay. Thank you. And then just kind of thinking about the benefit that could come throughout the year on the deposit side. Are there any large ceding 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?

Speaker 3

Yes. So we do have a solid pace of CD maturities coming, particularly in the first half year as well as in the 3rd looking just at next quarter, we've got about $2,000,000,000 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.

Speaker 3

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 a routine level. So as you look at the year, we do anticipate some average improvement from those CD rollovers.

Speaker 5

Okay, great. And then just last thing for me. I'm curious about the share repurchase. Obviously, you 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 That kind of potential thoughts around capital return?

Speaker 2

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 quarter from a capital standpoint and it lets us execute however we want to go in 2024 and beyond.

Speaker 5

Great. Thanks so much for the time. Appreciate it.

Speaker 2

Thank you, Steven.

Operator

And our next question comes from Casey Haire with Jefferies. Please go ahead.

Speaker 5

Hey, Stacy. Yes. Good morning, Stacy.

Speaker 6

Good morning, everyone. So a couple of NIM questions. Dan, you mentioned so you model towards the forward curve. Just wondering the where you expect the accum beta to peak versus that 41% level? And then when you do get these cuts, what kind of beta you have for 2024 when rates are declining?

Speaker 3

Yes. So our total deposit beta right now For the Q4 was 41%, that's compared to 38% last quarter. We actually because of the forward curve, those Rate cuts in the modeling begin in March. We actually have Deposit cost peaking in the Q1 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 4th quarter and we would expect that pace to further decline a little bit in the Q1 as well.

Speaker 6

Got you. Okay. And Appreciate the guide on the Q1 NIM up double digits at least or but just can you guys provide the Spot securities yield and borrowing rate, just so we get have a better starting point?

Speaker 2

Borrowing rate, so we're borrowing today in the bank term loan fund, if that's what you're asking about.

Speaker 5

I think that's

Speaker 2

what you're asking about.

Speaker 6

Yes, yes, yes. So I think you said so that goes to 4.80 and then the securities yield, the spot securities yield at twelvethirty 1.

Speaker 3

Yes. So at twelvethirty I think that the overall securities book is close to 260 given where the changes are.

Speaker 6

Okay, great. And just last one. So Slide 18 is great. You guys mentioned so it looks like the real opportunity is that you got a little less $9,000,000,000 of fixed rate loans With a $460,000,000 weighted average yield, how much of that matures this year? And then Within your bond book, you got $1,300,000,000 coming back at you.

Speaker 6

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.

Speaker 3

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 Just kind of think about the overall securities yield as a whole is 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.

Speaker 6

Okay. But no color as to how much of that $9,000,000,000 comes this year?

Speaker 5

I guess I'm confused.

Speaker 3

On the floating rate? So if you take a look at On that Slide 18, the very first two columns are basically the repricing within the 1st year. So We've got 49% of our total loans that actually repriced within the next year. Is that what your question? Sorry, I'm not Yes.

Speaker 6

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 in the $620,000,000 is but the real opportunity is the $462,000,000 all

Speaker 5

the way over to the right,

Speaker 6

which is about $9,000,000,000 right? And I'm just wondering How much of that $9,000,000,000 comes it reprises or matures within 2024?

Speaker 3

Yes, got you. There is it's probably close to $1,000,000,000 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.

Speaker 6

Excellent. Thanks for taking all the questions. Thanks guys.

Operator

And our next question comes from Manan Gazzania with Morgan Stanley. Please go ahead.

Speaker 5

Hi, good morning. Good morning.

Speaker 7

I wanted to start on credit. Your guide for 2024 implies And 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? Yes. Thanks for the question.

Speaker 8

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 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 the bulk of the portfolio that has been identified over the last several quarters.

Speaker 8

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 consideration, but I would expect to stay manageable within this level to slightly down as the year goes like we've seen since Q1 of 2030.

Speaker 7

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?

Speaker 8

Under those assumptions, I would say, yes, that's accurate statement.

Speaker 7

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 Rich 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?

Speaker 2

Yes, we don't have a CET1 target that's out there. We agree with you that 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.

Speaker 7

Got it. Thank you.

Speaker 2

Thank you.

Operator

Thank you. And our next question comes from Brett Rabatin with Hovde Group. Please go ahead.

Speaker 9

Hey, good morning, everyone. Hey, I wanted to ask on the balance sheet, the $1,000,000,000 you have remaining to reinvest, maybe Valerie, kind of how you think about that $1,000,000,000 or what you're looking for from a duration and yield And then just, Jan or Valerie, any thoughts on replacing the $3,500,000,000 What's the bank term funding program, what you might do to replace that?

Speaker 2

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

Speaker 5

I'm sorry, what was your other question? What was the first question? The remaining $1,000,000,000 $1,000,000,000 Yes, yes.

Speaker 3

Got distracted. There is about $1,000,000,000 left of the VAT. 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 years so given what rates are right now. That's probably not an unrealistic expectation for some of that.

Speaker 3

The other half Say, give or take is really it could be in securities, it could be in various fundings. 1st quarter has little bit of volatility with some of our public fund deposits that could be lowering some of that bank term funding program. Borrowings were 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 yield perspective.

Speaker 10

Okay. And then secondly, on the NPAs

Speaker 9

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 non performing. And my question is, is there anything that's Underlying that is, is it in healthcare, which is my guess, but are there any other industries that might be moving through the pipeline, so to speak?

Speaker 2

Yes, I think criticized has been basically flat now for multiple quarters. Like you go back to 3.31 was actually higher than we are today on criticized. So that perspective, it's been really stable. It's very well spread across multiple industries, Multiple geographies.

Speaker 8

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, not any specific geography. Like I said, those are idiosyncratic cases, but they are that industry.

Speaker 8

Otherwise, the other industry that we've seen some is kind of senior living, if that's what you mean by healthcare, then That's the one piece of healthcare where I would agree. Otherwise in healthcare, we're seeing pretty much stability.

Speaker 9

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 stabilized to move higher with new customer creation.

Speaker 2

We haven't seen a big change in average balance size.

Speaker 3

Right. Yeah, I think you're talking about on non interest bearing deposits.

Speaker 5

Right. But I

Speaker 2

don't think a big change in average accounts.

Speaker 3

Right. Not an average account, but A little bit of movement between the 2. 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.

Speaker 3

Our forecast has those non interest bearing to total deposits going down to 21% by the end of the 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 non interest bearing deposits that flowed out during 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.

Speaker 9

Okay. That's really helpful. Thanks for all the color.

Operator

And our next question today comes from Brandon King at Churrus Securities. Please go ahead.

Speaker 11

Hey, good morning.

Speaker 5

Good morning.

Speaker 12

So Valerie, on Loan yields and betas, did you potentially see a scenario where loan yields actually stay stable in the event of Fed rate cuts? And just how you're thinking about loan betas from here?

Speaker 3

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 We're forecasting that forward rate curve. We likewise have that yield on our earning assets, which includes continue to improve slightly through the first half of next year, but we're really kind of stabilizing off. And that's because of a couple of things. 1, and significantly, is that level of repricing of loans as they're coming on the balance sheet that we showed on that Slide 18 as well as of course the impact of loan growth being higher at higher yields than the overall portfolio.

Speaker 3

So that will continue to drive that up. Once there's 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.

Speaker 12

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 maybe hitting a soft landing and if there's more optimism just as far as investing in our own businesses?

Speaker 13

Yes, this is Chris.

Speaker 8

I'll kick it off. Our view is that it will be broad based.

Speaker 13

We have a great loan generating teams out there and we our view would be we can grow in all areas and all geographies as we look forward, especially

Speaker 8

if the rates do what they say they're going to do, that's going to

Speaker 13

generate some excitement and activity in the borrowing world.

Speaker 10

Yes, I completely agree with Chris. This is Hank. One thing we have is a continuing advancing in our CRE portfolio with multifamily construction loans, you'll see some modest growth there. And then as calendar changed in 2024 and we start reviewing pipelines, I'm pretty encouraged by what we're seeing. And it's pretty broad based as Chris mentioned.

Speaker 10

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 following the optimism category.

Speaker 12

Great. Thanks for taking my questions.

Speaker 2

Thanks, Brandon. Thanks, Brandon.

Operator

And our next question today comes from Joe Yanchunas with Raymond James. Please go ahead.

Speaker 14

Good morning.

Speaker 2

Hey, good morning. Hi. So

Speaker 14

the $3,100,000,000 securities restructuring in the 4th quarter was a little bit larger than the $1,500,000,000 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?

Speaker 2

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.

Speaker 2

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 have the low yield. So to be able to eliminate $3,100,000,000 at $126,000,000 return, we thought that was a good answer for us. What are we buying, Valerie, is the next question?

Speaker 3

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

Speaker 2

The restructure shortened duration, lowered risk weighting,

Speaker 10

Improved cash flow. It's just

Speaker 3

a win every way you slice it.

Speaker 14

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 twelvethirty 1. What kind of range are you looking for or what range would you be comfortable managing the balance sheet in that way?

Speaker 2

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.

Speaker 14

Great. And then the last one for me. Yes, it did. Within your revenue guidance, what's the between net interest income and fee income growth?

Speaker 2

Let's say that one more time.

Speaker 3

The split.

Speaker 6

What is the

Speaker 14

split between NII and fee income growth in your revenue guidance?

Speaker 2

I'll have that.

Speaker 3

Yes. And really we didn't provide it that way just because of the variability between the 2. 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 of the year.

Speaker 2

I think when you look at fees in 'twenty three and 'twenty four, I mean, clearly mortgage was

Speaker 3

Yeah. In a

Speaker 2

big way in 'twenty three and if rates do fall as they're talking there's real opportunity there.

Speaker 14

For sure. All right. Well, great. I appreciate you

Speaker 5

taking my questions. Thank you.

Operator

Our next question today comes from Matt Olney from Stephens. Please go ahead.

Speaker 11

Hey, great. Thanks. Hey, good morning, everybody. 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 4th quarter, but Sounds like you think it moderated.

Speaker 11

Any more color you can help us appreciate kind of why you think that's more moderate now than last quarter?

Speaker 3

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.

Speaker 11

Okay. So no other movements or migrations on the balance sheet beyond that that we've already covered?

Speaker 3

No, nothing else of note.

Speaker 11

Okay. Appreciate that. And then on the deposit go ahead, I'm sorry.

Speaker 3

I was saying you bet, Go ahead. Okay.

Speaker 11

I'm sorry. On the deposit growth outlook, I think the guidance calls for the low single digit growth. We'd 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? Thanks.

Speaker 2

Funding costs was increased slower in the Q4 than it had been. When you look at that overall financial expectations 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 That's the Community Bank team. It's certainly been growing on the interest bearing deposit side.

Speaker 2

We continue to enhance and improve our treasury management product. 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 there. So I think we continue to feel really good about where we are.

Speaker 3

The other thing that of note there, Matt, is the deposits at the end of the year include just shy of $400,000,000 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. Further

Speaker 5

reduction. Yes, further reduction. Okay, got it. Thanks guys. Thank you, Matt.

Speaker 5

Thank you, Matt.

Operator

Our next question today comes from Ben Gurlinger with Citi. Please go ahead.

Speaker 5

Hey, good morning.

Speaker 15

I was curious, just kind of point of clarification really. So with your guidance, does that assume the BTFP is static the entire year because if I had you guys getting rid of it, there's some flex in that NII outlook.

Speaker 5

Yes, I think that

Speaker 2

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 to fix rate products. So I think there's some questions in there as to how what happens and when it happens. Today, it's good price funding for us.

Speaker 2

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.

Speaker 3

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.

Speaker 5

Okay. So it is a bit of a

Speaker 15

dynamic model on that one. Okay. 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 M and A to start? Is it strictly just a political election outcome in December?

Speaker 15

Or are you looking for some rate cuts? Like Why are we not seeing much M and A today?

Speaker 2

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.

Speaker 2

There's a lot of desire 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 years, we think we've got capacity. We think we've got ability. We know our team can play. I think there's the marks And the unknown regulatory questions are still holding things back.

Speaker 15

Got you. That's fair. And then if I could sneak one in, If you did do M and A and you had all those question marks kind of answered, what would be the kind of the wheelhouse for an opportune size?

Speaker 2

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 within the footprints we serve. We like the dynamic growth markets that we serve.

Speaker 2

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 $1,000,000,000 would be what should be wanting to get to up.

Speaker 15

Got you. That's helpful color. Appreciate that.

Speaker 5

Thank you, Ben.

Operator

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

Speaker 16

Hey, good morning. Valerie, I was I just Wanted to circle back, I think you said the spot yield in 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 the spot basis. And I'm Getting this question from a few investors as well.

Speaker 16

What are we missing that's kind of making it more in the 2.6% range versus the mid-280s?

Speaker 3

Yes, I'm not entirely sure and Or the amount that you're considering, I mean, we of that $2,700,000,000 net that we sold, we've reinvested $1,000,000,000 into securities. And so it's not the entire 2.7. We've used some of it to pay down broker deposits, etcetera. The number you say Sounds a little high. So I'm not sure

Speaker 5

I'm

Speaker 3

quite tracking with you, but he can go through it in more detail. No, that's

Speaker 2

pretty granular to be able to get to here. Yes.

Speaker 16

Okay. But 26 is a good number to work off for the spot rate then is what you're saying?

Speaker 3

Yes. Yes. I think that's pretty reasonable. Yes.

Speaker 16

Okay, 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?

Speaker 3

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.

Speaker 16

I guess what I'm saying is there's not that much of a difference between 5.6% and 5.4%. And so the earnings pick up from redeploying. Yes.

Speaker 3

No, at this point it's going to be incremental improvement. A fair point. Absolutely.

Speaker 16

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 and A yesterday. I know you all aren't OCC regulated, but it feels like they're taking a little bit firmer of a stance in terms of like vetting each individual transaction. When you consider future M and A, does that Make you think about lean in one way versus the other in terms of acquiring an FDIC institution versus an OCC institution?

Speaker 2

No, I don't know that I'm familiar enough with the 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 is going to be really important.

Speaker 2

It's very damaging for both institutions inside of a merger when things delay and it just go on and on and on. It's very difficult.

Speaker 5

Got it. Hey, Freddie, let

Speaker 3

me come back. Actually on that securities, let me The $260,000,000 is not tax equivalent. I apologize about that. So actually, if you go back in and you get tax equivalent adjustment, It's closer to 275.

Speaker 16

Awesome. I appreciate that follow-up. The last one I had for you, Valerie, is

Speaker 5

Yes, so I think you

Speaker 3

asked me to help clarify it. Yeah, Thank you.

Speaker 16

The last one I had for you was just, if you're assuming the 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 total basis within the guidance?

Speaker 3

Yes, I don't have that forward beta available, but we do like I said show the deposit cost peaking in the Q1 and then started 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 2024.

Speaker 2

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 huge majority of that is 8 months. And so you can back into how fast that can roll off.

Speaker 16

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

Speaker 2

Thanks, Brody. Thanks, Brody.

Operator

Our next question today comes from Gary Tenner with D. A. Davidson. Please go ahead.

Speaker 5

Thanks everybody. Good morning. 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 Q1, do you expect that for the rest of the year, the securities book is pretty flat, you're just reinvesting cash flows or is there a number where that might trend to otherwise over the course of the year?

Speaker 3

Yes. It really depends on the opportunities within loan growth that are deposit growth at 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 budget purposes, liquidity purposes, etcetera.

Speaker 15

Okay, great. Appreciate it. And then the follow-up

Speaker 5

to that is, as you think about the BTFP repayment, whether it's sometime earlier in 2024 or at the end of the year, what I'm assuming part of that comes out of available cash. What's the kind of Cash target level under balance sheet, even as we're thinking out to the end of the year into 2025 some minimum on balance sheet cash liquidity?

Speaker 2

Yes, that's changed after March of last year.

Speaker 3

Yes. And there's probably $1,500,000,000 or so that would be It is 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.

Speaker 2

And large availability at the Federal Home Loan Bank, which is where we were funding prior to the BTFP?

Speaker 3

Yes, absolutely. We may bring it down a little below that target level from

Speaker 5

time to time. Again, variable.

Speaker 2

Thanks, Gary.

Speaker 5

Thank you.

Operator

And our next question today comes from Jon with RBC Capital Markets. Please go ahead.

Speaker 5

Thanks. Good morning. Hey, John. Good morning, John.

Speaker 17

Popular call. Yes, popular call today. 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?

Speaker 17

And what do you think is the right efficiency level for the company going forward? Where do you want to be?

Speaker 2

Yes. So ask that question one more time. I want to make sure I'm hearing you.

Speaker 17

Yes. What's left to do on FTE and where you're adding, where you're trimming And what do you think is the right efficiency level for the company going forward, efficiency ratio?

Speaker 2

Yes. Well, clearly the efficiency numbers came down with the sale of insurance and with the 400 or 500 people less that are 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 efficiency today, whether that's Technology investment that turns into efficiency, whether that's another move been restructuring to consolidate some areas where we can consolidate more together. The headcount reduction from here probably is not anything to excited about, I would anticipate that we would be hiring on the other side.

Speaker 2

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 when you're looking at the efficiency, we do believe we can continue to drive efficiency down.

Speaker 3

And part of that's through revenue.

Speaker 9

Right.

Operator

Okay. Okay.

Speaker 17

And Valerie, is that is the adjusted expense number from the 4th quarter, is that a good jumping off point for the Q1?

Speaker 3

Yes, yes, yes, I think that's right. Remember the Q1 has all the FICA expense and the 401 matching and all those other things, you can kind of see that trend in our past between the 1st and second quarter.

Speaker 2

Yes, that's on Page 4. Yes.

Speaker 3

Yes.

Speaker 9

Yes. Okay.

Speaker 17

I want to ask about Page 4 as well, but a quick one on Page 3. I'm not trying to be a smart aleck here, but what do you think that looks like in a year, Slide 3? Are there any big initiatives that you have out there, do you feel like things will be relatively clean from here going forward?

Speaker 2

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 noise and we outperformed on the noisiness of the quarter.

Speaker 3

But there were a number of things. I mean, And I said it, John, that we converted just over a year ago and we knew that there were a number of things that we could do that we really needed to get past that 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 efficient. And so there are going to be things incrementally, I'd say always. But from The size of what we did this past year, we doubt that we'll have a comparable year this

Speaker 5

Yes.

Speaker 2

I think as the team looks out and what we're working on from a strategic look forward, we've got a laundry list of items that can continue to execute on, but none of them anywhere come close to what we've done in the past year.

Speaker 17

Okay. 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?

Speaker 17

How much did you scrub this and where are some of the bigger variables in some of the guidance items that you laid out?

Speaker 2

Yes, I think when we're looking at Page 4, you've asked several questions in there. I think just the overall Look at Page 4, we're pretty confident and 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.

Speaker 2

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. Bauer?

Speaker 5

Yes. No, I think you said

Speaker 3

it well. I mean, there's obviously moving parts and 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 etcetera, 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?

Speaker 2

Stability. Stability in our what you've been talking about, we moved through a lot of Process changes, project changes, overhauls and 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.

Speaker 2

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.

Speaker 17

Okay. All right. Thank you very much. I appreciate it.

Speaker 2

Thanks, John.

Operator

And ladies and gentlemen, this concludes our question and answer session. Like to turn the conference back over to the management team for closing remarks.

Speaker 2

All right. Thank you again everyone for taking time to join us today. Once again, I am very proud of progress that we made in 2023. 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 and a very competitive deposit environment.

Speaker 2

And finally, the insurance transaction and the subsequent securities portfolio restructure will further enhance our efforts to improve operating performance. We are excited about the positive impact of these accomplishments, we are committed to continuing on our path to improve performance in 20 24 and beyond. You all again for joining us today. We look forward to visiting with you soon.

Operator

Thank you. This concludes today's conference call.

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Earnings Conference Call
Cadence Bank Q4 2023
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