Cadence Bank Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 22, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Cadence Bank Third Quarter 2024 Webcast and Conference Call. All participants will be in listen only mode. As a reminder, this conference is being recorded. I would now like to hand the call to Will Fisakerli, Director of Corporate Finance. Please go ahead.

Speaker 1

Good morning, and thank you for joining the Cadence Bank Third Quarter 2024 Earnings Conference Call. We have members from our executive management team here with us this morning, Dan Rollins, Chris Bagley, Valerie Tolleson 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.candusbank.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. These slides are also in the Presentations section of our Investor Relations website.

Speaker 1

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.

Speaker 2

Good morning. Thank you for joining us to discuss our Q3 2024 financial results. After I've covered a few highlights and Valerie provides additional detail on our financials, our executive management team will be available for questions. We are proud to report 3rd quarter results that reflect continued positive momentum for our company. GAAP net income was $134,100,000 or $0.72 per diluted common share with adjusted net income from continuing operations for the Q3 of $135,600,000 or $0.73 per diluted common share, an increase of $0.04 or 6% compared to the Q2 of 2024.

Speaker 2

From a balance sheet perspective, our deposit performance was a real highlight for the quarter. Our teams across the footprint have done a great job of retaining and expanding our deposits, resulting in significant growth in core customer deposits, over 11% on an annualized basis, while holding deposit costs essentially flat, up just 2 basis points in the quarter. We also generated meaningful new loan commitments. Although loans were flat for the quarter as payoff pressures offset the growth due to active capital markets activities creating pay downs as companies sell or refinance in permanent markets. Looking to the rest of the year, we are opportunistic that our new loan originations will outpace the payoff pressures as our loan pipeline remains robust and diverse and the economies in our footprint are performing very well.

Speaker 2

Stabilized deposit costs and continued upward repricing of loans also drove our 4th consecutive quarter of improvement in our net interest margin to 3.31%, up 4 basis points from last year. Importantly, credit quality continued to remain stable and in line with our expectations. Our net charge offs were consistent with the prior quarter and we maintained a solid allowance for credit losses at 1.38% of loans. While we did see an increase in non accrual loans primarily as a result of migration of a handful of previously criticized credits, our criticized and classifieds level have remained relatively consistent as a percent of loans during the year and we are not seeing signs of concern or weakness. We're also pleased with our continued performance and operating efficiency as reflected in our adjusted efficiency ratio of 57.7% for the quarter.

Speaker 2

As expected, our total expenses did increase as a result of merit increases as well as a few items that benefited our 2nd quarter expenses. Valerie will dive into these details as well as our expectations more in just a moment. Finally, we again took advantage of market swings and repurchased just over 323,000 shares of our stock. Our capital metrics remain strong, including CET1 of 12.3% and total capital of 14.5% as of September 30. And finally, our tangible book value per share increased by $1.60 while our tangible equity to tangible assets ratio ended the quarter at 8.28%.

Speaker 2

I'll now turn the call over to Valerie for her comments.

Speaker 3

Thank you, Dan. It is good to be here this morning discussing another great quarter for Cadence Bank. As Dan mentioned, we reported adjusted EPS from continuing operations of $0.73 up 6% from the second quarter of 2024 and up 37% from the same quarter last year. The adjusted items for the Q3 were minor, only a $0.01 net EPS impact and included a $1,200,000 reduction of the FDIC's special deposit assessment and $2,900,000 of securities losses we adjusted certain portfolio positions. As Dan noted, deposit growth was a real highlight for the quarter.

Speaker 3

Total deposit growth was approximately $985,000,000 for the quarter or 10.4 percent annualized. As laid out on Slide 4, this included growth of core customer deposits of $1,400,000,000 offset by declines in public funds.

Speaker 2

The

Speaker 3

core customer growth consisted of approximately $775,000,000 in interest bearing deposits and $600,000,000 in non interest bearing, of which $435,000,000 was in temporary inflows of customer balances at quarter end that swept out the next day. Even excluding the impact of the temporary inflows, our non interest bearing deposits as a percent of total deposits was stable in the quarter at 22.7% and the teams did an incredible job of retaining maturing time deposits and building customer balances. Loan balances were essentially flat for the quarter with net declines in non real estate C and I offsetting about a 2% overall loan growth in our other loan segments as we ended the quarter with loan to deposit ratio of 86%. The impact of the balance sheet activity on our margin continued to be positive as we increased net interest income by $5,100,000 in the quarter to $361,000,000 and our net interest margin increased compared to last quarter by 4 basis points to 3.31 percent. Slide 10 details our steady improvement in net interest margin over the last year.

Speaker 3

Compared to the Q3 of last year, our net interest margin has increased 33 basis points and our net interest income has grown 10%. Even with the decline in SOPR in the 3rd quarter, we continued to see increasing loan yields as only 29% of our loans are floating rate with about half of those being prime based. The combination of new fundings and variable loan re pricings and renewals coming on at rates higher than the overall portfolio led to our yield on net loans improving 5 basis points in the 3rd quarter to 6.64%. As Dan commented, our deposit costs have really stabilized even with the balance growth increasing only 2 basis points to 2.55% for the 3rd quarter. Additionally, average loans increased approximately $335,000,000 linked quarter funded by securities cash flows, which further improved the mix of interest earning assets.

Speaker 3

The 3rd quarter also benefited from our retirement of $139,000,000 of sub debt at the end of the 2nd quarter. And we have another $215,000,000 in sub debt with the 4 plus percent coupon that we plan to call in November. Additionally, we paid down $1,500,000,000 of our BTFP borrowings with excess cash just earlier this month. We expect to repay the remaining $2,000,000,000 of BtFP during the Q4, replacing it ideally with core deposits supplemented with wholesale sources as needed. Overall, due to all of these factors, we expect continued improvement in our net interest margin in the near term even with the forward curve interest rate reduction expectations.

Speaker 3

Non interest revenue highlighted on Slide 12 was 88.8 dollars on an adjusted basis, increasing $3,200,000 or 3.7 percent in the 3rd quarter as broad based fee growth was softened by a decline in mortgage banking revenue. The quarter's increase in deposit service charges of 1,100,000 was primarily in account analysis fees and the increase in other non interest revenue of $7,100,000 excluding the gain on sale of businesses in the 2nd quarter included growth in credit related fees, customer swap fees, SBA income and other miscellaneous revenue really across the board. These increases were partially offset by a $5,000,000 decline in mortgage banking revenue in the 3rd quarter as changes in the rate environment combined with payoffs and paydowns resulted in a mortgage servicing rights valuation adjustment of a negative $7,000,000 This was offset by mortgage production and servicing income of $8,200,000 reflecting growth of 3% compared to the prior year's quarter. Stepping back to a year over year perspective, total adjusted non interest revenue had solid growth during the year, up 10% compared to the same quarter in 2023. Moving out to expenses, total adjusted non interest expense was just over $260,000,000 for the quarter, up $9,200,000 or 3.7 percent, which was expected given the July 1st annual Merit cycle, as well as the tailwinds of several items impacting 2nd quarter expenses favorably.

Speaker 3

As laid out on Slides 13 and 14, compensation costs increased $4,300,000 compared

Speaker 2

to

Speaker 3

the 2nd quarter on an adjusted basis that is due almost entirely to the merit cycle Merit cycle impact. Legal expense increased $2,900,000 and other miscellaneous expenses were up $3,900,000 late quarter, with both increases simply a result of those lower second quarter expenses that included legal, fraud and operational loss recoveries well as other benefits that were unique to the Q2. On an overall basis, we continued to experience solid broad based expense management resulting in the quarterly efficiency ratio of 57.7% and our year over year reduction in quarterly adjusted expenses of 1.5%. Given our strong expense management and our outlook for the remainder of the year, we are updating our full year 2024 adjusted expense guidance to a range of down 1% to 3% compared with the 2023 full year. While very pleased with the reduction in expenses this year, we continue to invest in our growth, teams and technology and expect a more normalized expense growth rate to resume for 2025.

Speaker 3

Turning to credit results detailed on Slides 89. Net charge offs for the 3rd quarter were $22,200,000 or 26 basis points annualized, down slightly from the 28 basis points of the 2nd quarter. A significant portion of these charge offs were previously specifically reserved and we recorded a provision for credit losses for the Q3 of $12,000,000 bringing our ACL coverage to 1.38% at the end of the quarter. Non accrual loans increased by $56,000,000 in the Q3. And as a reminder, dollars 82,000,000 or 30 percent of our $273,000,000 in non accrual loans represent guaranteed portions of SBA and FHA credits.

Speaker 3

We don't expect collection issues with the guaranteed balances, but while they are in process, they do weigh negatively on our non accrual criticized and classified balances. Even so, our classified and criticized loans as a percent of total loans has been relatively consistent through the year. Classified loans as a percent of total loans were flat at 2.09% linked quarter and criticized loans increased slightly in the 3rd quarter to 2.64% but tracked lower than the same quarter last year. Our capital detailed on Slide 15 continues to build and remain strong supporting growth and the ability to be opportunistic. Dan mentioned this quarter's share repurchases.

Speaker 3

Year to date, we have repurchased 1,200,000 shares at a weighted average price of under $27 I commented earlier on our plans to call our $215,000,000 in subordinated debt in November. This debt is currently included in Tier 2 capital, so that will create a slight dip in Tier 2 in the 4th quarter, but we anticipate that to be temporary and replaced in the near term through ongoing earnings growth. In closing, it really was a positive quarter for our company and it was particularly pleasing to see the very strong deposit growth results, both in terms of growth as well as in managing costs. Beyond that, our net interest margin and fee businesses have continued to grow, credit remains stable and in line with our expectations and our teams have just done a fantastic job in improving operating efficiency over the year. We are optimistic and working hard to continue this momentum throughout the remainder of 2024 and into 2025.

Speaker 3

Operator, we would like to open the call to questions, please.

Operator

Thank you. We will now begin our question and answer session. Today's first question comes from Manan Gathalia with Morgan Stanley. Please go ahead.

Speaker 4

Hey, good morning all.

Speaker 2

Good morning all.

Speaker 4

I wanted to go through some of the puts and takes on NIM in the near term versus the medium term. So maybe to start on the asset side, can you talk about how we should think about the net impact of the floating rate loans repricing in the near term? Plus, it looks like you have some variable rate loans that you have coming due at a higher rate over the next 1 to 12 months. How should we think about that? And then finally, the fixed rate loan piece that you have repricing over the next year, because it seems like you've got a nice uptick in loan yields again this quarter despite rates not being up?

Speaker 2

Yes.

Speaker 3

Sure. I'm happy to take that. And I would just point you all's attention to we did have a correction on that Slide 11 that has our repricing maturity. And so there is an updated slide deck that was posted this morning, that details out really the categories of the rates. So you're exactly right.

Speaker 3

Our loan yields did continue to tick up even in spite of having 27% loading rate securities and that again is because the overall portfolio at 6.41%, we're putting on the new loans at rates higher than that. We also have loans that are variable rate or fixed rate that are re pricing or renewing coming back in at higher yields. And so when you take a look, you mentioned that coming on 3 to 12 months, the weighted average rate of the loans that are to reprice over the next 3 to 12 months is 634. We're putting on loans higher than that today. And so it's that incremental bump that we believe will continue to support loan yields increasing modestly as we look forward over the coming quarters.

Speaker 4

Got it. So you're saying you have the variable rate loans repriced at a slightly higher rate than what they are on the books at today?

Speaker 3

Yes, absolutely. Because they'll come on and effectively they're yielding the rate today, but when they come on for repricing, it's market pricing.

Speaker 5

So variable rate is going

Speaker 2

to be a 1 year off. Variable rate is going to reset further out than instantly.

Speaker 4

Understood. And then maybe on the liability side, you noted that you paid down some BTFP, you have more BTFP payments coming up. How should we think about deposit betas on the downside, given your comments that you would eventually want to replace that BTFP with core deposits?

Speaker 3

Yes. So, you likely noticed that we have deposit cost increase of 2 basis points this quarter. Of course, the rate declines that did come in the quarter were late in the quarter. So I would expect that this quarter is actually our key in deposit costs. We are working aggressively to be able to bring those deposit costs down and still continue to have the growth in deposits that we saw this quarter.

Speaker 3

That is on some of the exception prices, etcetera, that we're working hard on that. The other factor that I think is important to note is we have we had over almost $1,000,000,000 or $3,000,000,000 rather in signed deposits that renewed this quarter. We've got another $3,500,000,000 $3,600,000,000 that renew next quarter.

Speaker 2

Next quarter is the 4th quarter?

Speaker 3

Yes, it's in 4th quarter. Thank you, Dan. Yes, I forget my quarter I in. And they're actually at just shy of 5%. And so those will reprice at a lower rate, depending on the term that they come on and renew at.

Speaker 3

And so there is a little bit of tailwind for the repricing of some of that CD book that is coming up over the next 3 to 6 months.

Speaker 4

Got it. So in yes, thank you. And just to clarify, in terms of the deposit betas and the downside, what do you think you should get over the next couple of quarters?

Speaker 3

Yes. The rates just started coming back down, so we're kind of in that new cycle of reporting deposit payments. I'm not sure we're ready to talk about a specific number there other than we are working hard to be as aggressive as we can to bring those down while retaining deposits. So a little more on that I think as we come in the coming quarters.

Speaker 4

Appreciate it. Thank you.

Operator

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

Speaker 6

Hey, good morning, everyone. Wanted to ask first just on Dan, I know you mentioned a strong loan pipeline. Can you guys talk about the level of commitments maybe linked quarter and then maybe just gross versus net for 3Q in terms of actual production?

Speaker 2

Closed versus net. So yes, so we saw new loans coming on in the quarter was $1,700,000,000 ish and it was that's pretty close to where we were in 2Q. The pipelines are full. Chris and Billy are both sitting right here. I mean, the team is busy.

Speaker 2

We are running hard. I think we're winning a lot of business. We just can't keep it on the balance sheet. It comes to get paid off too fast. Billy or Chris?

Speaker 2

Yes. So a couple

Speaker 7

of segments, energy being the primary one where we've had more churn than normal midstream specifically. In the quarter alone, we had almost $200,000,000 in kind of refinances pay downs and that has a lot to do with the M and A market and bond market activity that has since slowed some, but our origination activity has not. So what Dan's pointing to is pipeline activity in that space specifically has been robust. We just haven't kept up with the pay downs, but I think over a period of quarters, we will and we will catch up more broadly and just general corporate C and I specifically. And we saw some of the same as more M and A activity driven that has created payoffs of our existing borrowers, but pipeline for filling back up is just any given point in any given quarter, it might be up or down.

Speaker 7

At the end of last quarter, it was flat.

Speaker 2

Okay. That's

Speaker 6

helpful. Yes, that's helpful. And then just on the guidance for total adjusted revenue, when you think about the margin being a little better going forward, I was surprised, I totally agree with the change in the expense guidance, but I was a little surprised you didn't tweak higher maybe the total adjusted revenue number higher. If the margin is going to expand in the Q4, is there anything that would not have that 5% to 8% be on the higher end of that range, fee income? Is there some other component that I'm missing on that?

Speaker 3

I think that that's certainly a possibility. I tend to still be a little bit conservative, I would say, on where we may end up with deposit costs. There's a lot of competition out there in deposits, but I do think that all of the uniquable, if we continue to see the trends that we're seeing, then the higher end range of that is not to be unexpected.

Speaker 6

I'm sorry, Valerie, the higher end is not to be unexpected?

Speaker 3

Yes. I think that's a reasonable assumption.

Speaker 6

Okay. Great. Fair enough. Thanks for all the color.

Speaker 2

Thank you, Brett.

Operator

The next question is from Catherine Mealor with KBW. Please go ahead.

Speaker 8

Great quarter. Good morning. I wanted to ask, Valerie, you mentioned that you think expense growth should normalize next year. We can put a big range around what normalized means. Is there any way to narrow that kind of conversation and maybe talk about it relative to revenue growth or what kind of level do you think is an appropriate level of expense growth?

Speaker 2

We agree it's hard to know what normalized is. We agree with that statement. I think we look at what inflation is doing to us. We're continuing to invest in our franchise. We're continuing to invest in our people.

Speaker 2

We're looking at the inflation rates. I don't know that we have a number today. Valerie, you may have more color than that.

Speaker 3

Yes. No, I think that says it well. And we'll be updating our expectations for the overall income statement as we report next quarter, as we look into 2025. But normal as in we don't anticipate the declines that we saw this year, but we're normalized with inflation and with continuing to obviously invest in our teams and technologies.

Speaker 8

Great. So it's fair to assume as we move into next year, if your margin is expanding maybe at a moderate pace, but still expanding and the origination volume you're seeing continues to drive loan growth, and then mortgage rebounding and all that, it's fair to assume that we should be in an environment in 2025 where revenue growth is faster than expense growth. Is that fair?

Speaker 2

I think that's fair.

Speaker 8

Okay. Great. Thanks for the clarity. Appreciate it. Great quarter, guys.

Speaker 8

And thanks for the new slide too. Thanks for the new slide too, Valerie. I was panicking over the variable rate loan declining.

Speaker 3

So thank you for refiling. Thanks.

Operator

The next question is from Michael Rose with Raymond James. Please go ahead.

Speaker 9

Hey, good morning guys. Thanks for taking my questions. Maybe just following up on the expense question. We've heard more and more banks talking about kind of leaning in on hiring efforts in order to kind of drive some additional loan growth next year. Can you just talk about maybe your hiring pipelines and if you'd expect that to be kind of a greater contributor to kind of a normalized expense growth next year as we

Speaker 2

would think about it and

Speaker 9

what that impact might be? Thanks.

Speaker 2

Yes, Michael, I appreciate that. I think the question is what's normalized? It's been so many years that hasn't been normal. What's normalized is the question for everyone. And we certainly are hiring people.

Speaker 2

We've got a leader on the ground in a couple of markets. We've got a leader on the ground in Fort Worth that just joined us. We're excited about and we continue to look for and we think we've got people in the pipeline that you called to come on board here in the near future. But I don't know if there's anything outside. I think that I would call that just normal investing in our franchise.

Speaker 2

I don't know if there's anything that we would call out that says we're going to hire this big team of people that are going to do something. That's not been our normal process. We haven't seen that opportunity present itself. That doesn't mean in the middle of next year that something doesn't come up. But right now, that's not what we're looking for.

Speaker 2

We're not plugging that into budgeting numbers as we look forward. I think normalized for us is going to be inflation on most things and we're going to continue to invest in technology and we're going to continue to invest in our people.

Speaker 9

Helpful. And maybe just as my follow-up, obviously nice build in capital this quarter. You guys bought back some shares. The earn back on the buyback though is getting up a little bit higher after the recent move in kind of all bank stocks, which has been nice to see. But can you just kind of outline your kind of near term buyback appetite?

Speaker 9

And then how should we think about the prospects of M and A as we move forward, especially once we get past the election? Thanks.

Speaker 2

No, that's 2 different questions. So buyback, we've been consistent all year long on the buyback. You've seen us do the same thing 3 quarters in a row. The market has hiccuped in some way. We've backed up and we've taken advantage of that.

Speaker 2

Our buyback is in place. We've got an annual process that we roll through on our buyback program. I would think that we continue to play Valerie in the same rules that we've been playing in audio.

Speaker 5

I don't think we change anything there.

Speaker 2

On the M and A front, there continues to be conversations. I think we continue to be one that would like to see expansion in footprint. We continue to see more opportunities or we continue to see more announcements with footprint expansion and that's less attractive to us. We would like to grow within the footprint. You've heard me talk for a while, we would like to grow in the markets we're already in.

Speaker 2

In no particular order, we'd like to get bigger in Tampa and Orlando and Nashville and Atlanta and Houston, Dallas, Austin and Chattanooga. And I can go on and on with the markets that we serve today, where we would like to be bigger within those markets. And so that's where we're focused and we're having conversations. I don't know that anything comes about immediately, but we want to be in the game. And we think today from a where we're trading capital wise, where we sit from a capital number, we think we're sitting in a really good spot to be able to execute.

Speaker 9

All right. That's a good list of markets there. So I think you'll have lots of opportunities. Thanks guys for taking my questions.

Speaker 2

Thank you.

Operator

The next question comes from Ben Gersinger with Citi. Please go ahead.

Speaker 2

Hi, good morning. Hey, good morning, Ben. Yes.

Speaker 7

I was curious if we could kind of just talk through about loan yields a little bit more here. I know you kind of answered it originally. So we just had a 50 basis point cut. Market is projecting a few more here in the next 6 months. Just kind of curious like how responsive have loan yields been to the most recent 50?

Speaker 7

Is everything priced in? And kind of going forward, any sort of color you can give a little bit more granular on kind of new loan yield rates or anything to that extent?

Speaker 2

Yes. So, Valerie is pulling that one up. The chart on Page 11, we break it out that way on purpose. The floating rate, it shows the $9,000,000,000 $9,100,000,000 27 percent of the portfolio at $806,000,000 that's virtually instant change within 30 day change.

Speaker 3

Yes, within 30 days, you're right, because it's both Prime and LifeCore and SOFR.

Speaker 2

Yes. But that's going to happen very short. That $9,000,000,000 is going to change very quickly. The variable rate structure that's behind it, some of that could change in the next quarter, some of it could change a couple of years out. So that's a much longer variable rate reset process and the fixed rate that $8,700,000,000 in fixed rate, some of that's going to mature in this quarter and get repriced also.

Speaker 2

So some of each mostly all of the floating rate stuff will be priced this quarter if rates change and some of the other two quarters will be priced. So that's why we're breaking it out the way we're showing it to you that way.

Speaker 3

And if you look back at this past quarter, the new loans came on at around a 7 $77,000,000 $75,000,000 level from what we're seeing come in.

Speaker 2

And remember the rate change was late in the quarter.

Speaker 3

Yes, absolutely. A lot of

Speaker 2

that was before the rate change. Yes.

Speaker 3

No, that's a fact. Yes, and the spreads have been pretty wide, but I would expect they probably come in a little bit with some of the rates, but actually.

Speaker 2

Got you. Okay.

Speaker 7

That's a lot of color. I appreciate that. And then on fee income, so I get the MSR's accounting and you have really no insight into that until someone in accounting tells you what it's going to be. But then if you back out securities gain, you kind of get to the, let's call it 95 ish, dollars 96,000,000 is that a fair run rate? Like kind of backing into here, is core or excuse me, is other sustainable?

Speaker 7

Is 96 a good kind of starting point for next year as a base? Or is there something that we might be missing here behind the scenes?

Speaker 3

Yes. I mean, we had a good solid performance. I mean, if you set aside the MSR, but I will say, if rates do come down, we expect the mortgage revenue to actually pick up on the production side of things and the ability to sell those into the markets and drive some non interest income. So I would expect that that's one variable that's really going to be rate dependent. Included in other NII was a little elevated this quarter compared to some of the prior quarters.

Speaker 3

I mentioned a slew of other items kind of miscellaneous positive move in a variety of categories. It can bounce around a little bit quarter to quarter. I mean, it can bounce around $5,000,000 quarter to quarter or more simply because there's some fair valuation that occurs within those numbers. Some of our FDIC investments, we have some other fund investments that get fair value quarter to quarter. So it can impact that and that's a little harder to predict.

Speaker 3

But other than that, we feel really good about our non interest income. The various sources, the wealth teams are doing well. Like I said, the interest rates and the mortgage, we anticipate that that should see some uptick as we look forward.

Speaker 2

The mortgage team is queued up for success. As we look at one of the things we've invested in this year since the mortgage team has done a good job of making sure that we've got great producers on the ground. They're ready to roll. If rates if the door opens for them, we're going to be able to harvest some mortgage revenue. On the wealth management side, the team is doing a fantastic job there.

Speaker 2

We're clearly asset priced. So if there's a change in valuation, we would be impacted there. But right now, things look really good on both of those lines of business.

Speaker 7

Got you. Okay, sounds good. Appreciate the color. Thanks.

Speaker 3

Thanks, Ben.

Operator

Thank you. The next question comes from Matt Olney with Stephens. Please go ahead.

Speaker 10

Hey, thanks. Good morning, guys. I want to go back to the expected pay down of this bank term funding program in the 4th quarter. It sounds like a portion of this is going to be from just holding lower levels of overnight liquidity. And I think that overnight liquidity level has been between $2,000,000,000 $3,000,000,000 for most this year, but it was below $2,000,000,000 last year.

Speaker 10

So I'm trying to appreciate if we should be assuming lower levels of overnight liquidity next year once we see the full impact of this TFB pay down.

Speaker 2

Yes, I think that's a fair assumption because we were actually earning dollars by holding what was out there. We were earning more on cash than we were paying for it. And I think that's a fair assumption on your part.

Speaker 3

Yes, exactly right. That $1,000,000,000 that we paid down in October was purely with excess cash. And so depending on where deposits go over the rest of the quarter, it will be either funded the rest of it by deposits or funded by some wholesale funding. But I expect that will formalize, if you

Speaker 7

were, if you

Speaker 3

said word a couple of times, our cash levels may be $1,500,000,000 ish, dollars 1,000,000,000 within that range.

Speaker 10

Okay, perfect. Thanks. And then on the credit side, I think you mentioned the non accrual uptick, was just from a handful of credits that were previously identified. Any more color on industry or just commentary on kind of what was what migrated?

Speaker 2

It's just generic normal flow. I think when you're looking back at the criticized asset number, it's been up 1 quarter, down a quarter, up a quarter, down a quarter. We're basically where we were a year ago today. Chris, Billy?

Speaker 5

No, that's well said. Zach criticized staying kind of flat. Normal migration of loans that were identified that we've been working through. The team has done a great job of working out of credits. And I think you see that in the ORE numbers and the net charge offs numbers and the normal flow of no industry specific systematic or system issues.

Speaker 5

It's just one off issue, if you will.

Speaker 2

Yes. It's hard to find fracs, weaknesses, concerns in any general area. It's just business is normal.

Speaker 10

Okay. Thanks, guys.

Operator

Thank you. The next question comes from Gary Tenner with D. A. Davidson. Please go ahead.

Speaker 2

Hi, Gary.

Speaker 7

Hey, thanks. Good morning. So you'd mentioned that you're working diligently obviously on the deposit side, but it's still pretty competitive out there. Can you talk about what you're able to do in terms of deposit rates following the September rate cut and what type of kind of receptivity or pushback you've experienced on customer side?

Speaker 2

It was probably too early to answer the pushback piece because this happened 3 weeks ago, but the team was pretty aggressive in making sure that we made changes the day that the rates dropped. So we reset our CD rates, changes the day that the rates dropped. So we reset our CD rates. Chris drives that process for us. We look at our exception pricing.

Speaker 2

The team has been doing a fantastic job all year long of hand to hand combat on the exception pricing process that we have within our bank. And we made sure that everybody was focused on that. We spent weeks coming into the drop, being prepared and we've moved. Chris, any feedback that you've heard in the last couple of weeks? I haven't.

Speaker 5

It's still competitive out there. Most banks dropped different amounts. We took theoretically kind of a they dropped the Fed dropped 50, we were looking at 50 across a number of our products as they dropped. Banks dropped a little bit less than that. I think we need and some more.

Speaker 5

So I think we're right in the middle of the pack. We're competing, we call it hand to hand combat with our clients. I think we've got the tools to retain the deposits and still grow deposits with the pricing that we have out there. Dan is right. I think it needs to settle down and let the rates have been bouncing a bit around and we're seeing our competition adjust.

Speaker 5

They're adjusting rate and also terms, so competing on term. Everybody's kind of ran to the short side and now you're seeing some folks step out a little bit farther on the term because that's attractive to the client from a deposit acquisition perspective. So we're on top of all of that watching it ready to compete.

Speaker 2

We're measuring in the field on both new production, what's new coming in the door and then we're also measuring on retention. The team is doing a really good job on retention.

Speaker 7

Great. Appreciate that. And then just a follow-up, I don't think I saw it in the deck or heard it in the prepared remarks, but do you have as a jumping off point kind of a September 30 interest bearing deposit spot rate?

Speaker 2

One more time, September 31.

Speaker 7

Do you have an interest bearing deposit spot rate as of September 30?

Speaker 3

I don't know. Yes, I don't think that we put that in. We had an obviously for the quarter, the interest bearing deposits at 3.30, but not a spot rate. But obviously, at business points, it's It's changed like

Speaker 2

3 times before that.

Speaker 3

Right, right. But we dropped it fairly significantly actually the very day that rates were announced.

Speaker 7

Okay, fair enough. Thank you.

Speaker 2

Thanks, Gary.

Operator

Thank you. The next question is from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Speaker 2

Hi, thanks. Good morning. Good morning, Jon. Most of my questions have been handled, but I wanted to go back to loan growth a little bit. And that I hear you on energy, but that general C and I has really been under pressure.

Speaker 2

Do you have any more color on that as to why that's happening and what could change that? I know, Chris, you said maybe that changes in a couple of quarters, but any more color on that? Yes. I think when you talk to the team, they feel like they're pedaling really hard to not see growth hit. I think the team, while we were talking about it coming into the end of the quarter, John, we actually thought that we had a likelihood that we would see some fundings and see some growth in that category before the end of the quarter and that didn't materialize, Billy.

Speaker 7

Yes. So, John, we've got our pipelines are great. We had some awarded transactions that we've got. We were hoping would close at the end of the quarter. They didn't.

Speaker 7

They're pushing. We're still in a good position on those. Some of the payoff activity is coming from kind of sponsor backed owned companies. The benefit we get from that is a lot of them are going to private credit lenders where we're keeping deposits. I mean, we were our corporate teams were able to have net core deposit growth.

Speaker 2

And a

Speaker 6

lot of it was because

Speaker 7

where we lost in loans, we kept treasury and depository accounts, so they no longer have a revolver and now they over fund working capital accounts. We'll take that trade from an earnings standpoint. But from a real loan growth, it's a fantastic pipeline that we see across the entire market spectrum and across various product groups as well that are specialized. So I feel good about where we're going to end the year. It just the payoff pressure was real and I don't think that will necessarily slow, but I think the pipeline will prove up.

Speaker 2

Okay. Does that help you, John? Yes, that does help. I get it. Dan, I asked you this a couple of quarters ago, and I think at the time you may be preferred higher for longer run rates.

Speaker 2

Do you have an opinion today? The Dan Rollins crystal ball, is there something you'd like to see Stability is the key at this point. Slower moves is better than stability.

Speaker 3

We're really pretty neutral. Looking at the change in the curves between September October, I mean it's negligible on what we're anticipating looking forward simply because of the way our balance sheet is positioned. To Dan's point, if rates are moving at 25 basis point increments, that's a lot easier for customers to digest. And it's a lot easier to try to capture more of that beta as we go forward. So if we have a preference, it would certainly be that they're a little slower pace than what they're going to do.

Speaker 3

Okay. Okay.

Speaker 2

All right. Thank you for the help. I appreciate it.

Speaker 3

Thanks, Don.

Operator

Thank you. Seeing no further queues in the line, this concludes our question and answer session. I would now like to turn the call back over to management for any closing remarks.

Speaker 7

All right.

Speaker 2

Thanks again everybody for joining us this morning. I'm sure you can sense the excitement and the optimism that our team shares regarding both our results we've discussed this morning as well as the path ahead. We think we're firing on all cylinders. Our bankers have done a tremendous job of protecting and growing our core deposit relationships as well as managing an active loan pipeline. Our fee businesses are reporting key success as well as including our mortgage and wealth management teams.

Speaker 2

And our administrative and operations teams are continuing to strive daily to improve our processes and efficiency and support our frontline teammates. It really is an exciting time and a rewarding time to be on the Cadence team. Thanks for your time today. We appreciate you joining us and we look forward to seeing you on the road real soon.

Operator

The conference has now concluded. Thank you for your participation. You may now disconnect your lines and have a great day.

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Key Takeaways

  • Strong Q3 financial performance: GAAP net income was $134.1 million (EPS $0.72) and adjusted net income was $135.6 million (EPS $0.73), up 6% from Q2 2024.
  • Robust deposit growth: Core customer deposits grew over 11% on an annualized basis, driving total deposit increases of $985 million (10.4% annualized) while deposit costs rose only 2 bps to 2.55%.
  • Improving net interest margin: NIM expanded to 3.31%, a 4 bp increase from last quarter and 33 bps year-over-year, supported by higher loan yields (6.64%) and stable funding costs.
  • Stable credit metrics: Net charge-offs were 26 bps annualized, allowance for credit losses stood at 1.38% of loans, and criticized/classified loan levels remained consistent with expectations.
  • Efficient operations and disciplined expenses: Adjusted efficiency ratio improved to 57.7%, and full-year 2024 adjusted non-interest expense is now expected to be down 1%–3% versus 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
Cadence Bank Q3 2024
00:00 / 00:00