Cadence Bank

Welcome to the Cadence Bank Corporation second 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 all, and thank you for joining us. Available with me today are Valerie, Hank, Billy, and Sam. I would start with the highlight of the last few months has been working with our prospective new partners at Bancorp South and making plans for joining forces after we have shareholder and regulatory approvals are completed. Both teams are increasingly excited, really very motivated about the significant potential we see of our combined platform. A senior team from Cadence and BancorpSouth, Dan, Chris, Valerie, Hank and myself have been traveling to multiple markets and meeting with our local bankers, answering questions and talking through the future together. Teams have traveled throughout the footprint from Austin to Orlando. We've been to 14 different cities so far and we have many more on the agenda. In markets where we have overlap, we often find our bankers know each other, and we have positive comments about mutual respect. But more often than not, there's not a lot of overlap. So Dan and Chris are learning quickly about opportunities in Atlanta, Tampa, and Orlando. And I've been extremely impressed with the great team of bankers, the strong community banking ties in markets like Tupelo, Little Rock, Nashville, Gulfport, or Baton Rouge, places where we have no presence. Many Bancorp bankers have long tenure with the company. People come to Bancorp South and they stay. It's a good sign. It's a sign of a good company. Just really impressed with the team. It's been such a pleasant experience. With every visit, I become increasingly more encouraged and confident about what our combined company can do. The integration plans and collaboration plans are going very well. So what looked like a strong merger at announcement looks even stronger today. To that point, I'd like to remind our investors that the shareholder meeting is scheduled for August 9th at 9 a.m. Central Time and will be a virtual meeting. So now let's turn to second quarter operating results, continue to have a strong year. Our adjusted PPNR for the quarter was 85 million or 1.83% of adjusted assets. This is stable compared to last quarter and continues to represent top tier operating profitability compared to peer. So just a reminder, our model, our mix of business with heavy C&I influence, it generates really attractive returns over time. Second point is credit. Credit continued to improve across the entire portfolio, evidenced by a $52 million reserve release taken in the quarter. Criticized loans declined 148 million or 18% linked quarter. Charge-offs continued to improve down 10 basis points to 29 basis points for the quarter. As I look to the second half of the year, I expect credit trends to continue in a favorable direction for the rest of the year. Loan portfolio ended the quarter at $11.6 billion. If you exclude the pay down of PPP loans, we were down modestly link quarter. Restaurant loans made up the majority of the decline, and that's by design. So our general CNI portfolio grew 42 million over the last quarter, and we are seeing some nice growth and new commitments through both the CNI business and our commercial real estate portfolio. So we're definitely seeing business activity is improving and the economy is accelerating, and I'm going to go out on a limb and say it feels like we might have reached the inflection point, but of course, no guarantee on this. Ample capital has long been a key strategic advantage of Cadence, and our position was further strengthened in the second quarter. At quarter end, each of our four key capital ratios increased significantly, and we all stand now in the low to mid teens, far in excess of levels deemed well capitalized by regulators. Our tangible book value per share ended the quarter at $16.72. So as has been the case in previous quarters, shareholders will receive a dividend of 15 cents per share. This will be payable to shareholders record date of August 6 and payable on August the 13th. With that, I'll turn the call over to Valerie.

Thank you, Paul, and good morning. For the second quarter, our adjusted net income was $106.1 million, or 84 cents per share, up from the prior quarter adjusted net income of 104.7 million and 83 cents per share. Similar to the first quarter, we recorded a provision release in this quarter of 51.9 million, reflecting the continued improvement in credit and economic forecasts. Even with this provision release, our allowance for credit losses remains robust at 2.13 percent. Turning to the balance sheet, loans of $11.6 billion declined $730 million during the quarter driven by PPP loan payoffs. Excluding the PPP loans, loans declined $142 million, including a decline of $55 million in the restaurant portfolio. It is notable, however, that general C&I loans which represent about a third of our total loans, reflected net growth of $42 million this quarter in spite of continued excess liquidity in the market. Deposits of $16 billion were down $145 million, but mixed improved as non-interest bearing deposits as a percent of total deposits increased to over 35% at June 30. We continue to add to our $4.3 billion securities portfolio, which is up $360 million this quarter. Additionally, our balance sheet liquidity remains elevated with loans to deposits at 73%. Net interest income decreased by $4.2 million in the quarter to $138.5 million, reflecting lower hedge revenue and accretion and a shift between higher-yielding average loans to lower-yielding average investment securities, partially offset by lower funding costs. While we have added to the securities book, we do continue to maintain significant balance sheet liquidity with cash and short-term investment balances averaging $2 billion during the quarter. Our net interest margin for the quarter declined by 12 basis points to 3.10%, again, driven by the decline in the hedge revenue and earning asset mix shift. On a positive note, deposit costs reached a record low of 15 basis points this quarter, down five basis points, which matched the decline in loan yields, excluding hedge and accretion income and PPP impact, which also declined by five basis points to 3.86%. You may recall we paid down $40 million of callable sub-debt in March with a rate of 4.9%. This quarter, we also paid off $50 million of maturing senior debt with a rate of 5.4%. Adjusted non-interest income showed nice growth in the second quarter at $46.5 million, up $2.8 million, or 6.4% from the prior quarter. Increases included account analysis, service charges, SBA income, credit-related fees, and alternative investment earnings, partially offset by softness in mortgage and seasonal declines in trust revenues. Adjusted non-interest expenses of $99.8 million continue to be well-managed, up 2 million or 2% compared to the prior quarter due to annual incentive accruals and merit increases. The adjusted efficiency ratio was stable at 53.9%. Driven by the quarter's net income and a reduction in risk-weighted assets, capital continues to grow and the ratios remain very strong. In summary, we continue to be very pleased with our 2021 performance as reflected in our PPNR remaining well above peer levels at 1.83 percent of total assets. Business generation is active across our business lines and geographies. Additionally, credit metrics continue to improve, funding costs continue to ratchet down, and we saw net growth in general CNI loans. Looking forward, given our strong capital and liquidity levels, attractive markets, and profitable business models, we are poised to capitalize on growth opportunities as we combine with BancorpSouth. Let's open the call for questions.