Cadence Bank

Welcome to the Cadence Bank Corporation fourth quarter and full year 2020 earnings call. Comments are subject to the forward-looking statements disclaimer, which can be found in the press release and on page two of the financial results presentation. Both of those documents can be located in the investor relations section at cadencebankcorporation.com. All participants will be in listen-only mode. After management's opening remarks, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Paul Murphy, Chairman and CEO. Please go ahead.

Good morning, and thank you all for joining us. Joining me today on the call are Valerie, Sam, Hank, and Billy Braddock. Billy is familiar to many of you, but not all of you. He's now serving as our Chief Credit Officer. When we started Cadence 11 years ago, Billy was one of the first people I asked to join me. Billy's a 26-year veteran of banking and business in Houston. He's very disciplined in his approach to credit. He's thorough, has a great eye for details. Billy has the confidence of the senior management team and our board, and it's a perfect fit to see him step into this important role. Billy is a real team player. As we look back on 2020, it certainly was challenging in many ways. But on the other hand, we feel pretty good about many aspects of our performance and have a real positive outlook towards the future. We continue to report an attractive PPNR and core NIM. Our deposit franchise improved significantly in 2020. We materially increased our reserves, and we enjoy very strong capital and liquidity positions. So Cadence today is really well positioned to move forward in 2021. I'm extremely grateful to our hardworking, dedicated team of bankers. I feel good about the markets we operate in, and Cadence balance sheet is really in great shape. So as a result of the many positive developments in 2020, we plan to resume our share buyback, increase the dividend to 15 cents, payable February 12th, and we plan to reduce maturing and callable debt. Fourth quarter was pretty solid from an operating perspective, and it showed encouraging improvement in credit as well. First on operating highlights, fourth quarter PPNR was $260 million, which includes $169 million in accelerated hedge revenues, so normalizing for that. we get to a PPNR of 91 million, and for the full year, PPNR of 373 million, which would be a 2.06 PPNR ROA. In normal times, we'd be pretty pleased with that number, but I would say it's a bit more noteworthy given the pandemic. NEM continues to be a good story. We increased five basis points to 354 link quarter. Most of that is driven by tightening of our deposit costs. Pleased with NEM. As I mentioned, credit metrics improved broadly. Fourth quarter is our second consecutive quarter in which NPAs criticized and classified loans declined. This quarter down roughly 20%, so that's good progress. Billy's going to share some of his perspective on credit later in the call. For the year, net charge-offs were 79 basis points, and our ending reserves, excluding PPP loans, was 3.12%. So we saw improved credit metrics in restaurant energy and in the C&I portfolios, while only hospitality saw some modest deterioration late quarter. Excluding hospitality, our CRE credit metrics are outstanding and are as is true with our mortgage credit metrics. Really good numbers there. So as we think about future growth, the headwinds that we've experienced the last few periods here meaning the decline in restaurant and energy portfolios are fading as those portfolios are pretty close to being appropriately sized. Also, the headwinds from just the softer economic backdrop are moderating, and many borrowers remain conservative. As the vaccine spreads, there seems to be some reason to be optimistic about 2021, and I guess the question that many bankers get these days about when will loan growth resume, of course, is still hard to answer with certainty, but it does feel like the second half of 2021 we should see some improvement in growth outlook for growth. So today our capital position is in very good shape. I'm really proud of the decisions that we made prior to and during the pandemic to ensure the strength of our bank. You look at our four primary capital ratios, each of them are up meaningfully over the prior year, and the highlight would be CE Tier 1 and Tier 1, both ending the year at 14%, up 250 basis points. So last, for tangible book value to end at 1583, up 8%, in an extremely challenging year, is a noteworthy accomplishment. So to summarize, all things considered, we're pleased with our execution, proud of our employees rising to the challenge. With that, I'll pause and turn it over to Billy.

Thank you, Paul, and happy to join the call. As Paul noted, and you all know, 2020 was a challenging year, and while there's still much uncertainty, we're happy to report that credit continued to improve over the fourth quarter. From a broad perspective, our charge-offs for the year were elevated, but at a manageable level given the COVID impact. Our criticized levels have shown improvement, and our most stressed categories are in generally a better position, but we've still got a really watchful eye on those. Let me start with net charge-offs for 2020, which totaled $106 million, or 79 basis points of average loans. Reserves ended the year at a total of $367 million, or 3.12% net of PPP. Non-performing loans were 1.17% net of PPP. The vast majority of the charge-offs were either fully or partially due to the COVID impact. COVID-related deferrals, on a related note, have continued to fall to $135 million as of January 15th of 21, down from $376 million at September 30th of 20. As we look at credit migration over the fourth quarter, the trends are improving. Specifically, non-performing loans declined by over 27% on a linked basis and by 39% when compared second half of 2020 to first half of 2020. If we turn to our pool of criticized loans, the trend is similar with the pool shrinking by 20% to $872 million. which was driven primarily by upgrades and paydowns. In fact, just 10% of the sequential decline in criticized pool was driven by charge-offs. By category, restaurant, energy, and general CNI made up the lion's share of the positive migration in a pretty even distribution between the three portfolios. The only category that saw an uptick in criticized was hospitality, which I'll speak to in more detail shortly. As we've done in previous quarters, let me quickly give an update on a few of the portfolios. First, our restaurant book include excluding PPP declined by $161 million or 16% year over year. The $837 million portfolio remains 75% quick serve and fast casual, which continues to perform well through the pandemic. The $156 million full service dining segments remain the most stressed segments of the portfolio. Charge-offs for the year were $33 million, or 3.5% of average loans, excluding PPP. Reserve for the portfolio is $53 million, or 6.3% for the total portfolio. While not specifically allocated, this reserve would cover 34% of the more stressed full-service dining segment. Non-performing loans sit at 6.4%. On energy, the overall portfolio declined 13.5% or $193 million from last year to $1.23 billion net of PPP. The more stressed E&P sector had the largest drop at 25% for the year and now makes up 20% of the energy portfolio while midstream makes up 65%. Energy charge-offs for the year were $16.7 million or 1.25% of average loans. Our reserves against the energy portfolio stand at 2.6%, excluding PPP, and non-performing loans are at 1.6%. For the broader CNI portfolio, charge-offs for the year were $46 million, or 1.2% of average loans. Our reserve against the CNI portfolio stands at 2.5%, excluding PPP, and non-performing loans are at 90 basis points. Now on the CRE hospitality segment, This is the portfolio that's under the most stress at cadence. The portfolio now stands at $257 million. These hospitality charge-offs for the year were $2.9 million or 1.1% of average loans. Here, too, we believe the bank is in a good reserve position with $50 million or 20% against the portfolio of $257 million. Non-performing loans sit at 90 basis points. A couple of higher points are on the CRE excluding hospitality and on residential mortgage, as Paul mentioned. Some of the stats behind it are the CRE portfolio excluding hospitality ended the year at $2.65 billion with only 46 basis points of non-performing loans. Outside of the hospitality described earlier, credit performance is hard to complain about today in this sector. Comparable stats can be said for our $2.5 billion residential mortgage book of business. These teams of bankers have really navigated 2020 quite well. So overall, as Paul mentioned, the bank has come a long way in the past year from a credit perspective, and there's a lot to be cautiously optimistic about, with cautiously being the operative word. As we look into 21, we remain vigilant on credit, we're encouraged by the trends, and we look forward to a return to a more normalized credit environment. With that, let me turn the call over to Valerie.