Cadence Bank

Good morning, and thank you for joining the Cadence Bank second quarter 2022 earnings conference call. We have our executive management team here with us this morning, Dan, Paul, Chris, Valerie, and Hank. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our investor relations page at rr.cadencebank.com, where you'll find them on the link to our webcast, or you can view them at the exhibit to the 8K that we filed yesterday afternoon. These slides are also in the presentation section of our investor relations website. 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 Rollins for his opening remarks.

Good morning, everyone. Thank you for joining us today to discuss Cadence Bank's second quarter 2022 financial results. Our team continues to be very pleased with the progress we are making toward finalizing our combination. Our results for the quarter certainly shine a light on some of our accomplishments. Today, I will provide a brief integration update, and I'll also cover a few highlights this morning, and Valerie will dive deeper into the financial results. After we conclude these prepared remarks, our executive management team is available for questions. We continue to successfully work through our operational integration plan. As we've mentioned in the past, we have several ancillary system conversions that either have been or will be completed prior to the core conversion. For example, earlier this month, we successfully completed the conversion of all of our mortgage loans onto one platform. We also continue to reach key milestones related to our core system conversion scheduled for later this year. For example, we have completed the renumbering of all duplicate accounts. We are currently in the process of converting over our ATM or ITM fleet to one platform, and we have now successfully completed two mock conversions. Our operations and technology teams have put forth a tremendous effort, working long hours over many months to get us to this point. Our executive management team is extremely proud of this progress and confident we are on schedule to complete the system conversion in the fourth quarter. We also recently revealed certain additional aspects of our brandings. which complement our new logo and perfectly reflect the mission, vision, and values and culture of our new Cadence Bank. The customer experience has remained at the center of each step we've made as we plan for this integration, and I'm inspired by our team's commitments, whether it be the operational and administrative teammates who I alluded to earlier, or the best-in-class bankers who are out there building relationships and taking care of our customers every day. As we move to our financial results for the quarter, We reported net income available to common shareholders for the quarter of $124.6 million, or 68 cents per diluted share, and adjusted net income available to common shareholders of $134.2, or 73 cents per diluted common share. We also reported adjusted PPNR of $176.7 million, or 1.51% of average assets on annualized basis. Each of these metrics, EPS, adjusted EPS, and adjusted PPNR, increased in excess of 10% on a linked quarter basis. From a balance sheet perspective, we had a great loan growth quarter, reporting net loan growth of $1.2 billion or over 17% annualized. This brings our year-to-date total to $1.5 billion or 11% annualized. These results are directly correlated to our frontline bankers' enthusiasm about our merger. The markets across our footprint continue to perform very well. Our loan growth efforts for the quarter were very diverse, both from a product and geographic standpoint. We reported meaningful growth in our commercial and industrial, commercial real estate, and residential mortgage portfolios. From a geographic perspective, within our community bank, we reported considerable growth in our Texas, Florida, and Missouri markets, as well as parts of our Mississippi markets. On the corporate side, we saw nice growth across several of our industry verticals and geographies, led by our Texas and Georgia teams. Excluding the growth in residential mortgage, the remainder of our growth in the quarter was almost evenly split between our community bank and our commercial bank. We reported a minor decline in total deposits of $379 million, which is consistent with historical seasonal trends. On a year-to-date basis, Deposits are still up just over 370 million, or almost 2% annualized. As expected, our net interest margin and net interest revenue continue to benefit nicely from rising rates. Our reported margin improved 14 basis points on a linked quarter basis to 306. Excluding the impact of accretion, the margin actually increased 20 basis points. Credit quality continues to be very strong. We reported net recoveries for the fifth consecutive quarter while we had additional declines in both classified assets and non-performing assets. Credit is certainly becoming a more prevalent topic in the industry, and it appears there may be some dark clouds on the horizon. For our company, our credit quality metrics continue to show improvement. Rest assured, our team is watching very careful for any signs of stress. Our operating efficiency ratio continues to improve. Adjusted non-interest expense declined by just over 9 million, or 3%, compared to the second quarter, contributing to a decline of over 300 basis points in the adjusted efficiency ratio to 60.5%. While the reduction of expenses was benefited by a few non-recurring items, we remain confident on our ability to continue to harvest the cost saves from our merger. Finally, I would like to provide a brief update on our efficiency efforts related to our branch structure. During due diligence, we identified several potential branch consolidation opportunities, seven of which were divested just after the merger closing. Given the continued development of digital technology and online banking and related changes in customer behavior, our team is now working to consolidate 17 additional branches into other nearby locations during the fourth quarter. These branch consolidations will result in an estimated annual cost savings of approximately $8 million per year. With that, let me turn it to Valerie for her comments. Valerie? Thanks, Dan.

Turning to the quarter's results, slide three provides a view of our summary income statement. Just as a reminder, with the mid-fourth quarter 21 closing of the merger, both the first and second quarters of 2022 represent full quarters for the new cadence. Dan spoke to the meaningful growth in our earnings this quarter, highlighted by our strong and diverse loan growth, coupled with a 5% quarterly increase in our net interest margin and improved operating leverage. Our adjusted net income of $134.2 million increased $12.6 million during the quarter and was adjusted for merger related expenses of $13 million. As shown on slide four, we reported net interest income of $325 million for the second quarter, an increase of over 4% compared to the first quarter of 2022. Our net interest margin was 3.06% up from 2.92% in the first quarter. Excluding the impact of accretion, as Dan noted, the late quarter net interest margin increased by 20 basis points. Both net interest income and the net interest margin continue to benefit from both the loan growth we've generated as well as rising rates. The yield on net loans, excluding accretion, was up 16 basis points from the late quarter. We also saw a similar increase in our securities yields, which increased 12 basis points in the late quarter. Our total cost of deposits at the same time remains stable at 17 basis points for the quarter, up only two basis points. While Fed Funds have increased 150 basis points year-to-date, our total deposit costs have actually been flat during this time period. We do anticipate deposit costs to increase as we look to the rest of the year, but expect it to be gradual and still support an improved net interest margin. Our balance sheet remains asset sensitive with approximately 68% of our loan portfolio floating within 30 days, or variable rate. Slides 5 and 6 provide some additional color on our non-interest revenue and non-interest expense. Non-interest revenue of $125.2 million declines $3.2 million due to lower MSR valuation adjustments in the quarter. Before these adjustments, non-interest revenue increased just over $6 million. Insurance continues to show impressive results with commission revenue growth of over 10% on both a sequential and comparable quarter basis. Our customer retention rates remain very high, and the pricing market is still very firm for the industry. We also reported a nice increase of over $5 million in our card and merchant fee income, which is primarily the result of our annual incentive payment from our card vendor, as well as increased revenue from improved contractual revenue share in 2022. Our mortgage team has performed impressively this quarter, with originated volume of $913 million, the highest level in five quarters. While we are continuing to experience margin pressure in this area, given the rate environment, home purchase money volume remains very strong, totaling $776 million for the quarter, up from $575 million last quarter. Finally, the late quarter decline and other non-interest revenue included a $1.2 million purchase accounting adjustment, reducing second quarter revenue as we finalized the day one fair value of unfunded commitments acquired as part of the legacy cadence merger. Our non-interest expenses for the quarter are certainly a positive story, with total adjusted non-interest expense of $271.8 million, declining just over $9 million, or 3%. The decline included a reduction of $5.7 million in compensation costs, which was driven by a seasonal decline in payroll taxes and 401k match, as well as a reduction in our group medical expenses. We also reported a significant decline in the amortization of intangibles, which included an incremental $3.7 million reduction in expense as we finalized the legacy CAED acquired intangible asset valuations and trued up the related expense. These contributed to a meaningful decline in the adjusted efficiency ratio to 60.5% for the quarter. Our annual merit increases were effective July 1st, so that will begin to impact compensation costs in the third quarter. However, we anticipate continued modest improvement in the overall core operating leverage as we look out through the rest of the year. Slide 7 and 8 highlight our loan and deposit portfolios. As Dan noted, the $1.2 billion of net loan growth in the quarter was broad-based and included an approximate 60-40 split between new loan fundings versus draws on existing commitments. We are running at an overall line utilization level of approximately 47% consistent with recent past quarters. The quarter's modest decline in deposits was largely in accounts that increased in the first quarter with total deposits up actually since year end. Non-interest bearing deposits make up a consistent 35% of our total deposits. Finally, slides nine and 10 provide details in both credit and capital, both of which continue to be strong. In addition to the continued net recoveries Dan mentioned, our non-performing assets declined 11% in the quarter and have declined 30% since year end. Likewise, our classified assets declined 12% in the quarter and 30% since year end. We ended the quarter with our allowance for credit losses up slightly at $440 million, representing 1.55% of loans, and back to $1 million provision for credit losses in the quarter. In a nutshell, our earnings, performance, and balance sheet are strong. Our teams are executing well, and we are very well positioned for increasing rates as well as any potential economic headwinds. Operator, we would like to open the call now to questions.