Cadence Bank

Welcome to the Cadence Bank Corporation first quarter 2021 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 these 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. Well, good morning, and thank you for joining us. With me today are Valerie Tolson, Sam Tortorice, Hank Holmes, and Billy Braddock. As many of you know, we hosted a call announcing our merger with Bancorp South on April the 12th. I would encourage investors to review that presentation to learn more about our strategy and the significant opportunity we see for our overall combined companies. For our call today, we're going to be focused on first quarter results. So with that, let me give a couple of highlights. First off, I think it's a solid quarter. Overall, I think there's three primary takeaways. The first is that CATUS continues to drive solid operating results and returns. Our adjusted pre-tax, pre-provision net revenue remained attractive at $86.4 million, or 1.86% of assets. In my opinion, this is a nice reminder that our business model, with a meaningful mix of C and I, does generate nice profitability. Our loan yields, excluding hedge and accretion, declined slightly, down seven basis points in the quarter, while our cost of funds declined six basis points in the quarter. We earned $105 million for the quarter, or 23% return on tangible common equity, which admittedly is elevated due to the reserve release. The second takeaway for the quarter is that credit continues to improve across the board. Credit size and classified assets are, yes, still higher than we'd like, but they're down materially from the peak of COVID and now the lowest level since March of 2019. The $48 million negative provision is not a recurring item. I understand that, but I don't want to brush over it as it is really a strong indicator and a validating data point for the broad improvements we're seeing in credit. So I'd like to say that thinking back on 2020, the year was really about cadence and our borrowers working hard to de-risk. And the tone and the feel for 2021 is much more about improving health of business activity, the recovery of borrowers and operating cash flows. Our broader C&I portfolio has improved really as it has for most banks. Our more COVID-exposed portfolios, restaurant and hospitality have improved from last year and improved in the first quarter. Non-performing loans declined over 11% late quarter. Our reserves as a percentage of non-performers now stand at 250% compared to 154% at the same time last year. Criticized assets have declined for another quarter. The improvements that we're seeing here again are broad-based across all aspects of our portfolio. The pool shrunk by 6.4% at link quarter and finished the quarter at $816 million. We're seeing improvement by upgrades and paydowns in restaurant, energy, healthcare, and hospitality. To summarize, we're pleased with the results and credit for the first quarter. We maintain a view that credit trends will continue to improve as the year progresses. So last, there's just more business confidence, increasing demand across our portfolio. Every day as the vaccination rates increase, more companies are anticipating a normal operating environment and it just sort of feels better out there. The underwriting environment has remained disciplined with regard to terms and structures. Our paydowns slowed to the lowest level in over a year and As I mentioned, really borrowers just seem more confident. We originated at about a billion dollars in loan fundings in the quarter, driven primarily by a great team of bankers. Our C&I and CRE portfolios were really the results that were most notable in the quarter. So as a result of all these things, I'm increasingly confident that we will see the accelerating loan growth in the second half of the year. We're pleased with the beginning of 2021. So let me just emphasize a number of paths that Cadence has to drive shareholder value. We're well-capitalized, an experienced, motivated team of bankers. We operate in some of the fastest-growing markets in the United States. I think these factors are a powerful combination of factors to reflect on. Of course, very importantly, the multiple-layer benefits we see the strategic synergy that we can drive with Bancorp South will only serve to accelerate and strengthen our ability to grow and deliver returns for shareholders. Just since the announcement, really the excitement and enthusiasm, our team, our bankers, I know the same at Bancorp South, the communities we serve, our customer reaction, it's just all been really consistently very, very positive. So with that, I'll pause and turn the call over to Valerie. Thank you.

Thank you, Paul, and good morning. For the first quarter, our adjusted net income was $105 million, or 83 cents per share, down from the prior quarter adjusted net income of $200 million and $1.57 per share due to accelerated hedge revenue recognized in the fourth quarter and a negative loan provision in the first quarter. The first quarter allowance reflected a provision release of $48.3 million reflecting improvement in economic outlook and continued declines in criticized and non-performing loans. Even with the reserve release this quarter, our allowance for credit losses remains robust at 2.49% or 2.67% excluding PPP loans. Turning to the balance sheet, loans of $12.4 billion declined $354 million during the quarter or $223 million excluding PPP loans. It is notable, however, that this quarter's net reduction in loans was about a third of what it was in the fourth quarter, as we are seeing a resurgence in loan pipelines begin to pull through. Strategic reductions in the quarter included $33 million in restaurants and $23 million in E&P paydowns. Deposits of $16.1 billion were up $77 million during the quarter, with $184 million growth in core deposits partially offset by maturing broker deposits. Our non-interest-bearing deposits as a percent of total deposits increased to over 34% at March 31st, up from 31% at year-end. We continued to add to our $3.9 billion securities portfolio in the quarter, up $600 million. Additionally, our balance sheet liquidity remains elevated, with loans to deposits at 77% and cash balances of $1.9 billion. Net interest income decreased by $14 million in the quarter to $143 million, reflecting lower hedge revenue, fewer days in the quarter, and balance sheet mix changes, partially offset by lower funding costs. It is important to remember the significance of our balance sheet liquidity. In the first quarter, our cash balances averaged $2.2 billion, yielding less than 15 basis points. Once we are able to effectively deploy this excess liquidity into earning assets, we do expect that to flow into interest income accordingly. Net interest margin for the quarter declined by 32 basis points to 3.22%, again largely driven by the decline in hedge revenue and excess balance sheet liquidity. Loan yields excluding hedge and accretion income were 3.91% in the first quarter, down 7 basis points, while cost of deposits ended the quarter at another record low of 20 basis points, a decline of 5 basis points, slink quarter. We also paid down $40 million of callable sub debt in March, with an annual rate of 4.91%. Adjusted non-interest income in the first quarter was $41.4 million. Excluding the fourth quarter accelerated hedge revenue, other non-interest income increased $2.2 million during the quarter, as we saw nice results across the board, with some linked quarter softness in mortgage and credit fees driven by volumes. Adjusted non-interest expenses were $98 million, down $7.5 million compared to the prior quarter, and with the adjusted efficiency ratio coming in as anticipated at 53%. Capital remains very strong, with our common equity Tier 1 and Tier 1 ratios up to 14.2%, and total capital at 16.7%. In summary, we are encouraged by our first quarter. Credit metrics reflected multiple facets of improvement. Loan pipelines are active across our footprint. Funding costs continue to decline, and PPNR remains well above peer levels at 1.86% total assets. Looking forward, given our excess liquidity, strong capital levels, attractive markets, and motivated team, we are well positioned to capitalize on growth opportunities as the economy continues to improve. With that, let me turn it back to the operator for questions.