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spk07: 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.
spk04: 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.
spk01: 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.
spk08: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Michael Rose with Raymond James. Please go ahead.
spk02: Hey, good morning, everyone. Thanks for taking my questions. Maybe for Valerie or Paul, it's really good to see the momentum in a lot of the fee income businesses this quarter and I guess my question is, is this run rate sustainable? Obviously SBA gains were a little bit higher. You had some rebound in strength from the account analysis fees on the service charge side and advisory income and trust all did pretty well. So I guess I'm just trying to get a sense, do you think the momentum in a lot of these fee income businesses you know, will continue or, you know, there's maybe some acceleration in some of the businesses that we saw this quarter. Thanks.
spk04: Yeah, I'll comment and invite Valerie's comments as well. Matt, I mean, it feels like a pretty good portfolio when I look at our wealth business, mortgage, so that's the small business. You know, I mean, on any given quarter, can it bounce around a little bit? Of course it can. But I think the core portfolio is really complimentary. And as the growth resumes, which, as I mentioned in the prepared remarks, we feel like we're at an inflection point that I think these fee income businesses will follow. It's kind of all a function of number of accounts and number of new businesses and activity overall. It's a derivative of all those things. And I'm a touch optimistic there. So I don't know. That or your perspective.
spk01: Yeah, actually, we feel very good about the fee revenue and where we ended up this quarter and the ongoing outlook for that. Just as a couple of additional comments on that, you know, for the service charges, you know, most of that increase was in account analysis charges. Given the rate environment, you know, our earnings credit rate is down significantly from where it has been over the past couple of years. You know, it takes you a while to kind of get down to that level, but we're there now and you're starting to see that flow through. in the income um the the mortgage banking revenue was softer this quarter but that's probably a more normalized level you know we're just most of what we sell is uh refinances and um you know that's that's dwindling down uh significantly and so but even with that softness the strength and the other lines of business on the fee income uh really support it very nicely on the sba income There was a little bit, about $300,000 of SBA servicing rights, so that can be a little bit volatile there. But the rest of it was really related to the sale of those loans and the business. And the reason that that's up significantly is really that we made a choice to outsource effectively this last round of PPP loans. to a partner, freeing up that SBA team to do what they do best and generate those loans. And that's part of what you're seeing is the value associated with that decision come through in the bottom line.
spk02: Very helpful. And then just switching to the margin, if I exclude all the accretion and the PPP fees, obviously we're down. Do you think we're getting to a point, though, with some of the balance sheet actions and the deposit mix shift where we're getting closer to a bottom here on kind of a standalone basis before the deal closes? Or would you expect some additional compression over the next couple quarters? Thanks.
spk01: Yeah, that's the million-dollar question, obviously. Our deposit costs have come down really nicely. The pace on that is going to slow. We do have a little bit more room there with about a billion in repricing CDs over the next six months or so, as well as the impact of the debt paydowns that we've made. But as we put on new loans, they are coming in at a lower yield. That, however, is significantly higher than securities yields or cash. And so we are hopeful that we have reached that bottom, but it is going to depend a little bit on that earning asset mix as we look forward. But to Paul's point on the inflection side, we do have very nice pipelines on the lending side, and I may let them speak a little bit to that.
spk02: Okay. Yeah, and just following up on that, it was good to see the general middle market, you know, CNI increase. You know, was that more a function of, I assume that wasn't a kind of existing line draws, but maybe just, you know, growth in the portfolio. Maybe if you can just touch on, you know, the pipelines and kind of where they stand and what, you know, transpired quarter to quarter and any comments on what utilization, you know, looks like at this point. Thanks.
spk06: I'll probably jump in here if that's okay. This is Hank. We are seeing some nice volumes in loan committee. Our CRE team has been very active over the last year. It's kind of nice. I do all my one-on-ones prior to this call, and I'm getting a lot of good feedback from the Treasury side on deposit generation and fee income, as kind of alluded back to what we were talking about earlier. But seeing nice volumes on the loan side across the board. A little bit of pressure from competition as there are a lot of folks out there looking for loans, but I would echo the comment on the NIM and optimistic about the loan growth and the turn that we feel is underway.
spk02: Okay. Thanks for taking my questions.
spk08: Our next question will come from John Arfstrom with RBC Capital Markets. Please go ahead.
spk00: Hey, thanks. Michael took one of my questions on lending, but you talk a little bit about deposits as well. Pre-pandemic and pre-merger, we used to talk about some of your deposit market share gains. It's kind of hard to tell with all the liquidity in the market, but if you kind of set aside stimulus and government impact, what's happening underneath in terms of some of your business wins in market share in terms of deposits?
spk04: Yeah, John, I'll comment and, again, invite others. I mean, we have continued to ask our calling officers to focus on deposit growth. I mean, we want core deposits. We want more checking accounts. We've seen nice improvement in our mix over the last couple of years with more DDA. But your observation is right. I mean, it is sort of muddled given all the liquidity in the system and a bit harder to rate. have pushed rates pretty hard. With the amount of liquidity in the system, we just can't afford to pay as much for deposits. And so that all flows through, I guess would be one way of saying it. But core deposits are still valuable. And in the long haul, we want to grow that book. And the Treasury team is out hard all day, every day. and looking for new business, and we'll keep going that direction. Others, comments?
spk06: I would just say that's well said. When we see the volumes pick up on both sides, our Treasury team is very active with our commercial loan officers, and as I mentioned, we've got great leadership there with Katrina, and the pipelines are very strong.
spk00: And I'm not sure who will take this one, but just in terms of some of your coordination and traveling with Dan and Chris, how are you guys thinking about coordinating some of your lending activities? And I'm curious if you're altering your lending approach at all as you anticipate the combination.
spk06: I'm sorry. I'll comment. Go ahead, Paul. I couldn't pick up that question. My apologies. It must be my phone.
spk04: Yeah, the question was, you know, how do we plan to alter our lending, if any, and, you know, going to market as a team. And, John, I would say it this way. I mean, it's pretty much there's just not a lot of overlap. So the people are going to be doing basically what they've been doing all along. You know, we're going to continue to, you know, focus on the segments where we've been active. And, you know, there's just I guess the best way to summarize it is, because everybody's going to keep doing pretty much what they've been doing.
spk00: Another question here, maybe it's for Billy, but do you guys expect any more material step downs in non-performers before deal close? Are there some things there that are closer to resolution?
spk03: Thanks, John. Timing of this is great. Every month we do kind of our criticize and classify kind of monthly update meeting and we had that last Friday and I would say it's the opposite. Our trends are continuing to improve. While we don't have perfect visibility into timing of some of the resolutions and upgrades, we do have visibility into probably another 25 to 35% reduction in criticize over the next two to three quarters. I'd say it's more trending in a positive manner than, you know, your suggested question of do we have any surprises. There's always going to be, you know, something that pops up, but I think on a macro basis we're feeling more positive than negative. Okay.
spk00: All right. Thanks a lot. Appreciate it.
spk08: Thanks, John. Thanks, John. Again, if you have a question, please press star then one to be joined into the queue. Our next question will come from Matt Olney with Stevens. Please go ahead.
spk05: Good morning. This is actually Jordan, his associate. I'm in for Matt. I've got a couple questions for you all. What percent of your loans are at a variable rate? And then within those variable loans, what percent are currently at their floor?
spk01: Yeah, sure. I'll take that. We've got about 65% of our loans are variable rate loans. and that largely being driven by our CNI business. And we have, let's see, about $2.2 billion. So close to 30% of those loans are actually on their floors right now.
spk05: Perfect. Thanks. And then just to follow up to that, what's the spread between the floor rates and the contractual rate? Just trying to kind of appreciate how many rate hikes we're gonna need to see for these loans to get above their floors?
spk01: Yeah, the average floor for those that are on their floor is 375. And this might give you a little better perspective, however. We've got a shock plus 100 of our net interest income of plus 4.6%. If you take that to a plus 50 basis point shock, it's plus 1.9%. So just a little less than half of that. So that gives you a little bit of perspective that the second 50 basis points, you'll get more than the first 50, but it's not dramatically different.
spk05: Perfect. Thank you. That's it for me. Appreciate it.
spk08: Again, if you have a question, please press star then 1. As there are no more questions, this concludes our question and answer session. I would like to turn the conference back over to Paul Murphy for any closing remarks.
spk04: So, great, thanks. In summary, I would just say I'm really pretty pleased with the first half of the year based primarily on our continued execution as evidenced by the strength in PPNR. Reminder, we're in an attractive footprint with some nice growth markets. Our C&I business is well positioned. Really, we have a nice balance of businesses, our wealth and mortgage business. I like the mix of our business mix. We expect credit trends to continue to improve. And lastly, as was mentioned, our plan combination with our partners at Bancorp South represent a really unique opportunity to create an organization with scale and expertise that I believe will drive value for shareholders and customers and the communities that we serve for many years to come. So with that, the call is adjourned.
spk08: The conference is now concluded. Thank you for attending today's presentation.
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