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spk14: Good day, and welcome to the Cadence Bank second quarter 2023 webcast and conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Will Fazakerly, Director of Corporate Finance. Please go ahead.
spk00: Good morning, and thank you for joining the Cadence Bank second quarter 2023 earnings conference call. We have members from our executive management team here with us this morning, Dan Rollins, Chris Bagley, Valerie Tolson, Hank Holmes, and Billy Braddock. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our investor relations page at ir.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. These disclosures regarding forward-looking statements contained in those documents apply to our presentation today. And now I'll turn to Dan for his opening comments.
spk17: Good morning, everyone. Thanks for joining us today to discuss Cadence Bank's second quarter 2023 financial results. I will provide a few highlights, then Valerie will review our financials in more detail. Following our prepared remarks, our executive management team will be available for questions. We reported quarterly net income available to common shareholders of $111.7 million, or $0.61 per diluted share. The adjusted net income available to common shareholders was $116.9 million, or $0.64 per diluted common share, with the primary difference being non-routine expenses associated with our ongoing initiatives to improve efficiency, which I will discuss more in just a second. We had another strong quarter from a loan growth standpoint with net organic growth of 1.3 billion or 16.3% annualized. Year-to-date growth is now 2.2 billion or 14.7% annualized. Growth for the quarter was well distributed from a product and geographic perspective. Mortgage production was robust, supported by second quarter seasonality. Additionally, we saw continued fundings from CRE commitments during the quarter. We will continue to fund commitments in the coming quarters But overall, we expect the pace of loan growth to slow to an annualized mid-single-digit growth rate for the second half of the year. Total deposits declined just over $700 million in the quarter and have declined approximately $250 million year-to-date, or 1.3% annualized. Our community bank deposit base continues to hold up very well, with most of the pressure coming from corporate accounts. Some of the corporate declines are typical second-quarter seasonality – However, this year, some of it is also driven by commercial customers seeking yield. Community bank deposit outflows were $130 million in the quarter, while year-to-date growth for the community bank now stands at $347 million. Like many others, we felt the industry-wide pressure on funding costs at a faster pace this quarter and saw the impact on our margin accordingly. Valerie will discuss this as well as our revised expectations and her margin comments in a moment. As we look at a couple of our other highlights, our results reflect strong performance from our fee income businesses, including record quarterly insurance commission revenue of nearly $46 million. We reported a meaningful increase in P&C commissions driven by business growth and retention, as well as upward pressure on policy pricing. Finally, we continue to work aggressively towards improving our operating efficiency. We reported a decline of approximately $8 million, or 2.6%, in linked quarter total adjusted non-interest expense. We also refined our savings estimates related to the efficiency initiatives that we discussed in our first quarter call, including 35 branches that we expect to close within the next 30 days, as well as various ongoing initiatives, including early retirements and other personnel savings. These initiatives are now projected to produce non-interest expense, reduce non-interest expense by approximately $35 to $40 million annually. The majority of these actions associated with these initiatives will be implemented during the third quarter, and we expect to reflect the full benefit by the first quarter of 2024. Valerie, I'll turn the call over to you.
spk11: All right. Thank you, Dan. Looking at the results for the quarter, we see four broad themes, including key business development successes, stable credit quality, acceleration in funding costs, and progress toward improved operating efficiency. Breaking down net interest revenue and margin on slide 11, we reported net interest income at $334 million for the second quarter, a decline of approximately $21 million compared to the first quarter of 2023. Of the decline, $5 million is related to lower accretion income compared to the first quarter, with the remainder being driven by accelerated funding costs. Our net interest margin was 3.03% for the second quarter, down 26 basis points from the length quarter, or 21 basis points, excluding the decline in accretion. Our total cost of deposits increased to 1.87%, up 59 basis points from last quarter. As you may recall, we added 1.9 billion in broker deposits in March of this year and maintained those balances in the second quarter. Factoring out broker deposits, our core customer cost of deposits increased 45 basis points in the second quarter as we continued to see migration from non-interest bearing products to interest bearing. The percentage of non-interest bearing to total deposits declined from 29.2% at the end of the first quarter to 26.4% at the end of the second quarter. Our yield on net loans excluding accretion was 6.18% for the second quarter, up 31 basis points from the prior quarter. And at June 30, our total deposit data was 35% cycle to date, while our loan data excluding accretion was 44% cycle to date. Looking to the second half of the year, we currently anticipate our net interest income and our net interest margin to stabilize. supported by continued loan growth and a slowing of both deposit outflows and the mixed shift from non-interest bearing to interest bearing. Additionally, we are forecasting a gradual increase in the cumulative deposit data to around the 40% level by the end of the year, with a cumulative loan data excluding accretion increasing to the 50% level. Non-interest revenue, highlighted on slide 14, was $132.3 million. Excluding the securities losses, non-interest revenue increased approximately $7 million, or 5.5% compared to the first quarter. Insurance commission revenue increased $6 million, or 15% linked quarter. And impressively, insurance revenue has grown 14% compared to the second quarter of last year. Mortgage banking revenue was relatively flat linked quarter with a decline in production and servicing revenue offset by improvement in the MSR asset valuation. The decline in other non-interest revenue was largely the result of timing of elevated SBA and credit fees related to activity in the first quarter that we had earlier this year. Moving on to expenses, which are highlighted on slides 15 and 16. Total adjusted non-interest expense declined $8 million from $305 million for the first quarter of 23 to $297 million for the second quarter. The largest linked quarter decline on an adjusted basis was $4.8 million in salaries and employee benefits, largely attributable to seasonally higher payroll tax and retirement plan expenses in the first quarter of each year. Data processing and software expenses declined $3.9 million on the linked quarter basis, including the result of savings associated with vendor contracts and service agreements. Finally, other miscellaneous expenses declined 3.6 million compared to the first quarter, including lower levels of fraud losses, as well as several other smaller items through various miscellaneous expense categories. As we look forward, Dan mentioned that we have updated the cost savings estimate associated with our strategic efficiency initiatives to 35 to $40 million annually. The 35 branch closings will occur during the early part of the third quarter. and the early retirements and other personnel savings will be phased in over the course of the rest of 2023. We incurred non-routine costs of $6.2 million in the second quarter associated with these initiatives, and we anticipate incurring an additional $10 to $12 million over the remainder of the year. Factoring in these initiatives, as well as our annual merit cycle increases that were effective on July 1st, We expect our quarterly adjusted non-expenses to decline in each of the third and fourth quarters. Finally, speaking to credit quality on slide nine, our provision for the quarter was $15 million, up slightly from the $10 million provision in the first quarter of this year, primarily as a result of the loan growth we saw in the quarter. The $15 million was made up of a $25 million provision for funded loans, partially offset by a $10 million provision reversal on unfunded commitments. This dynamic is attributable to both the continued funding of lines as well as the slowing of new unfunded originations. Net charge-offs increased to $12.7 million in the second quarter, or 16 basis points as a percent of average loans, on an annualized basis. The net charge-offs were largely the result of a C&I credit that was identified as impaired and reserved for in a previous quarter. In addition, Non-performing loans and non-scoring assets improved slightly compared to the first quarter, declining $4 million and $6 million, respectively. We also continue to be comfortable with our classified and criticized asset levels as a percent of total loans at 1.9% and 2.7%, respectively. We are pleased with the overall stability of our credit quality, and while there are always a handful of issues being worked on, we've not seen indication of specific concentration or segment concerns. In summary, our results reflect a number of positives this quarter, and there is a lot of momentum as we look forward. We expect stabilization in our net interest margin. CRC businesses continuing to perform well, and we are executing on various fronts to improve our operating efficiency. We also continue to have solid liquidity, credit, and capital metrics, providing a strong foundation for our ongoing business growth. Operator, we would now like to open the call to questions.
spk14: Thank you. 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. Please limit yourself to one question and one follow-up. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Catherine Miller with KBW. Please go ahead. Thanks. Good morning.
spk17: Hey, good morning, Catherine.
spk13: I thought I wanted to start on the margin. Valerie, I found your commentary on the updated beta is interesting, especially the loan beta that you're pointing to a 50% cumulative beta as we end the year. And just curious, as you think about the loan repricing that you see in the back half of the year, I mean, we saw a pickup in loan betas this quarter. And so as you see deposit costs and maybe the mix shifts stabilize, you're pointing to a stabilizing margin, but is it... possible to even see the margins starting to increase, maybe next quarter's too soon, but as we're exiting 23 and into 24, just given your outlook for how you see loan yields repricing. Thanks.
spk11: Thanks, Katherine. Great questions. First of all, I will say that what we are anticipating is one rate increase in the third quarter and then no more for the rest of 2024, or excuse me, for the rest of 2023, and then nothing really until the middle part of 2024. So that's really the foundation for these assumptions. To your question, yeah, we've included the slide again in our slide deck that shows the loan pricing characteristics. And yes, those loans continue to reprice, the loan growth that we've got, all of that is fueling that loan yield to continue upward. That being said, it's all about the deposits. So could it improve as we go toward the end of the year? Absolutely, if deposits behave properly.
spk17: So obviously, behave properly. Deposits behave.
spk11: That's exactly right. You know, I think what we saw in the second quarter was a bit unusual for the whole industry. You know, if we were to see another quarter like that, then, you know, that certainly wouldn't be the dynamic. What we are looking at, based on some of the recent trends, is the slowing, like I said, of some of the migration out of non-interest bearing. Still expecting some continued migration. Don't let me misstate that there. as well as some continued deposit runoff. But again, a somewhat slowing of those trends, and that's what's built into that stabilization comment.
spk17: We continue to believe higher for longer is better. Higher for longer can be better for us.
spk13: Okay, great. And then in that, on the non-interest bearing remix, what's your, I mean, I know we just have no idea, but what's your best guess on where you think that bottoms as you just look at your business mix and some of the trends you're seeing throughout the back, maybe especially the back half of the quarter as that stabilizes.
spk11: Yeah. So what we are actually modeling right now and projecting is by the end of the year being down to the 23, 24% level compared to the 26% level right now, a percent of total deposits. Depending on, again, kind of what happens in the back half of the year, we could see that possibly going even a little bit lower into the early part of 24, but that's probably a little too early to call at this point.
spk13: Got it. Okay. But if we blend together Cadence and Legacy Bancorp South, you know, back in 2016, you were at about, I think about 26%. So just a little bit below maybe pre-COVID levels on a combined basis, it feels like, but not drastically lower. Yeah.
spk11: That's based on some of the monthly trends and some of the recent activity and behavior that we're seeing that causes us to model it in that direction. Yeah, that's exactly right.
spk13: Okay. Okay, great. And then can you just give us a flavor for where new deposits are coming on today, maybe in your different products, CDs, and money markets?
spk17: Yeah, most of the new deposits are coming on the CD on the high end. You know, we're seeing a little bit of a win on non-interest bearing and some customer wins that we've picked up in a couple of places, but most of the dollars are flowing in on the interest bearing high end side. Okay.
spk13: Great.
spk08: I mean, I might just add to that. Yep, go ahead. I might just add a little color to that. I mean, we are actively seeking the corporate deposits. We had indicated that there was some decline there. We were seeing some nice wins and some seasonality in that that our Legacy K folks had I'd seen in the first couple of quarters. And I feel very good about where the pipelines are on the corporate side going forward.
spk11: And I would just say from the CD promotional rates, those are, you know, to your point, Catherine, five to five and a quarter percent is the pricing that we're seeing right now. Many markets, you know, are probably in the three and a half percent level.
spk13: Great. Thank you.
spk15: Thank you. Thank you.
spk03: Thanks, Catherine. Appreciate it.
spk14: question comes from Michael Rose with Raymond James. Please go ahead.
spk07: Hey, good morning, everyone. Thanks for... Good morning, Dan. Thanks, everyone, for taking my questions. Just a follow-up question on deposits. I know the brokered deposits were down a little bit, linked quarter. What are the kind of expectations for those balances as we move through the year? I'm just trying to get a sense for, you know, how much matures and what's kind of taken on in that short-term nature and the depths of the... the failures in March. Thanks.
spk11: Yeah, sure. So, yeah, it did come down a little bit. We did, you know, most of those were fairly short-term, three-, six-, nine-month type of brokered CDs and brokered deposit arrangements. We do anticipate at this point really probably maintaining that level, at least in the foreseeable future, just with the deposit outflows in the industry. it's probably likely that we'll maintain those for a little bit longer than obviously we would have in the past.
spk07: Okay, that's helpful. And then just to kind of, you know, backing up on Catherine's question and the guidance, you know, it sounds like maybe a little bit more pressure on the NIM in the third quarter and, you know, maybe a little bit more pressure on NII, but, you know, that should kind of stabilize to rebound in the fourth quarter and then you have a pretty big gap between the loan beta and deposit beta expectations, even though deposit betas rose from your prior expectations. Is that kind of just broadly speaking the way to read it, Valerie?
spk11: You know, I think as we look to the rest of the year, we think there's opportunity to stabilize the margin really throughout the last half of the year. not just in the tail end of it.
spk17: It's back to deposits behaving appropriately.
spk07: Well, I did hear those sirens in the back, Dan, earlier, so maybe you guys got the cops after those depositors. That's right. Just switching gears a little bit, just wanted to kind of square the circle on the incremental cost savings from some of the expenses You know, I think, you know, you'd mentioned that you'd expect deposits down kind of third and then into fourth quarter as a result of that. You've kind of previously given a range of $290 to $300 million, but you have these extra costs, you know, savings. Obviously, you're doing some investing in the franchise as well. Is that still kind of a good range or would you potentially dip below kind of the $290 as we get into the fourth quarter? Thanks.
spk17: Yeah, you've got a couple of things going on in this quarter and three, Q. Number one being the impact of annual salary changes. We do that effective July 1. So that's an add to the third quarter run rate there. But we also see the savings that are coming in. So I think the $35 to $40 million that we're going to harvest out in the back half of this year, you'll see all of that in the first quarter. So that's a $10 million a year $2 million a quarter drop off of the numbers that you see today, you're back into the investing. So you've got the upside. The only significant up that I'm aware of today would be the salary changes in 3Q. Valerie?
spk11: Yes, that's exactly right. And then on a gap basis, some of the one-time costs, but we'll identify those quickly.
spk07: All right, perfect. I'll step back. Thanks for taking my questions.
spk03: Thanks, Michael.
spk15: Our next question comes from Manon Vesalia with Morgan Stanley.
spk14: Please go ahead.
spk18: Hi, good morning. Hey, good morning.
spk19: I was looking to get some more color on just the level of conviction that NIM and NII should stabilize from here. Can you talk about the rate of change that you saw during the quarter? I think you just made a comment that part of your guide was based on the more recent flows that you were seeing, and many of your peers have also noted that June was better than April and May, so I was wondering if that was something you saw as well.
spk17: That's exactly right. April was the worst month of the quarter, and we got better in May and June, and that's why you're seeing us model and have some confidence that we're stable.
spk19: And what do you think drove that? Was it just improving customer behavior? Was it better management of liquidity? Or was it just more conviction that the environment is improving so you were able to you know, price your deposits appropriately and manage liquidity more appropriately?
spk17: I think the customer behavior in April was all a result of the March madness in the banking industry, and that's what we were dealing with in April, and things have calmed down since then. Got it.
spk10: Okay, perfect. We've just seen – yeah, go ahead.
spk11: A little bit more stability in the behavior, the outlook, and the pricing as we've gone through the quarter.
spk19: Got it. All right. Perfect. In terms of just cash and level of liquidity, I think last quarter you had said a billion or so of cash is a level that you're comfortable with. I think you're around there with about $1.7 billion right now. So can you help us think through what the appropriate level of liquidity is and also maybe the rationale behind the $1.2 billion of BTFB borrowings from this quarter?
spk11: Sure. Yes, we brought down our cash levels about $3.5 billion this quarter, and that was really because of the excess cash that we put on at the end of the first quarter. And, you know, just like the stability that we mentioned on the deposit front, just really didn't see the need to maintain that excess liquidity. On the levels that we have right now, it's still probably a little higher than what I would – say, as a historical norm. And so over time, you know, that may dwindle down maybe another half a billion or so. We're comfortable today. Yeah, to a more normalized level. But we're comfortable where we are today. And then, yes, you're right. We actually did replace some federal home loan bank borrowings with a bank term Funding program borrowing, about $3.5 billion there at a rate that was lower than the federal home loan bank borrowing, and we can pay it back at any point in time. So it was a net improvement for us on the margin and on our expense costs.
spk18: Got it. So you just substituted part of the FHLB with BTFB? That's exactly right. All right, perfect. Thank you.
spk10: And saved a little money to boot.
spk03: Thank you. Appreciate it.
spk14: Our next question comes from Brandon King with Truist. Please go ahead.
spk04: Hey, good morning. Hi, Brandon. Yeah, so I want to touch on loan growth. Obviously, it's slowing back half the year, but could you give some more context behind what's driving slower loan growth? And with the stronger seasonality of Resi, are we expecting Resi to be a bigger contributor in the back half of the year as well?
spk17: Say that last part again, the strong.
spk11: Because Resi was a strong contributor. Oh, Resi.
spk17: Yes, yes, yes, yes, yes. Yeah, second quarter residential will drop back. Remember, the third quarter will drop back from second quarter. We expect to see that to drop. And the secondary market is improving a little bit there. So the stabilization in rates is helping the secondary market. So that's what you're seeing. On our side, what's coming on the balance sheet is ARM product, that ARM product. hopefully we'll be able to be moved into the secondary market more and more as the market picks up. From a slowing back half of the year, I think the industry as a whole and our process ourself is seeing much less coming through the pipeline, but lots of people are in the room here. Hank and Chris and Billy.
spk08: I think you're exactly right. We've seen really a credit tightening within the industry, a real focus on making sure that we have clients that we benefit from both sides of the balance sheets, We're taking care of our clients, but at the same time, we are very keenly focused on the deposit generation and what that looks like the second half of the year. But I think in general, you're just seeing an overall credit tightening within the industry.
spk11: And I think as part of that, there's a little bit of tightening on the spread that comes as part of that. And so by being able to be a little more selective, it allows us to do a little bit better on pricing.
spk04: Got it. And just to follow up on that, since the industry is tightening in general, is there any appetite to kind of take market share with higher credit spreads and kind of be more opportunistic in this sort of environment?
spk17: We've told our team absolutely to be out talking to the customers that you've been wanting to bank for a long time. You know, where there's an opportunity to move over a customer that we've been wanting for a long time, we're absolutely open for business and have had some successes in doing that, but we're being selective.
spk11: Focusing on the customers that have closets as well is a key component to the lending that we're doing today.
spk17: We need a full relationship.
spk11: Absolutely.
spk04: And just lastly for me, just given how the trends were better in the latter part of the quarter, How close was the June NIM to the average quarter NIM?
spk11: I mean, we're probably not going to give specific numbers, but I mean, it was, you know, like I said, April was the biggest deposit cost change that we saw on a percent basis, and then that trended down throughout the rest of the quarter.
spk10: And that's what gives us, you know, some of the projection basis that we have going forward.
spk03: Okay. Thanks for taking my questions. Thank you, Brandon.
spk15: Our next question comes from Brody Preston with UPS.
spk14: Please go ahead.
spk09: Hey, good morning, everyone. Good morning. Valerie, I wanted to... I wanted to follow up on the loan beta commentary. I was hoping maybe on the three- to 12-month bucket that you guys give in the deck, you've got about $2 billion of loans that are repricing within the next three to 12 months. They have a 576 loan yield. I guess where does the loan yield go when those reprice in the current market?
spk11: Yep. So what we saw in the past quarter was renewed loans coming in somewhere in a quarter-ish range, give or take, a few basis points, depending on the type. And so that's a meaningful bump from what we see on there. Now, that's going to have mixed, depending on what the product is. Loans that are mortgages, obviously, are lower than that. But that's what we saw in the new renewed loans that came on in the second quarter.
spk09: Okay, so that'd be like a 250 basis point pickup or so on... Four to 6% of the book by year end. I guess I'm just trying the 50% cumulative beta step up with only one more rate hike seems to indicate some significant repricing for the book, I guess maybe beyond what's in the three to 12-month bucket. So I was just trying to square those comments.
spk17: Yes, it's higher for longer, continues to allow us to reprice assets forward that have not repriced yet. Yes.
spk11: and combined with the loan growth that, you know, we've been able to see, even though it's slowing, that will still be a contributor to those data as well.
spk09: Okay. And then on the non-interest bearing commentary that I think April was the worst, May and June both improved. When you say improvement, do you mean the rate of change improved? Do you mean the dollars actually grew just because the average and the period end declines aren't too dissimilar? They're both 11 to 12 percent. And so I was just trying to make sure I understood, was it June was just down less than April was?
spk11: From the rate of change, yes, it was down less than April was.
spk17: Yeah, you said that right. Yeah. Rate of change improvement. Yeah.
spk09: Got it. Okay. And within the margin commentary, how much, I guess, is there any dependence on, I think you said the $1.8 billion of brokerage is going to maybe stick around, but that $1.2 billion of BTFP that you had on average, I guess, is there any expectation for that to move lower within that margin commentary?
spk11: Really, that's going to depend on the rest of the balance sheet. You know, we lock that in at rates in the second quarter that are going to be favorable as we go forward. We can maintain that, you know, for a little while. And so just really kind of depending on where the rest of our balance sheet goes, we'll use that as a variable factor to potentially bring it down.
spk17: So you're quoting a quarterly average rate, a quarterly average balance on that, and I'd be looking at quarter end on that.
spk11: Yeah, quarter end on that. $3.5 billion and just over a 5% rate.
spk09: Okay. Okay. So that full, I guess the full $3.5 billion that I see at quarter end, is that all BTFP?
spk10: Yes, that's right.
spk09: Okay. Okay. Thank you. That's the vast majority. All right, and then I did just want to follow up with just two last questions. Just on the July 1, the merit-based increases that you referenced, can you give us a sense for what the, I guess, what the dollar size amount of that is, just so we can make sure we're modeling the quarterly variations, given all the moving parts from the cost savings and that?
spk11: Yeah, it's $3.5 to $4 million per quarter.
spk09: Okay. Okay, and then the last one was I was just trying to understand the nuances in the criticizing classified. I think the accounting change shifted a decent amount on the residential mortgages from substandard back to pass maybe, but the commercial criticized classifieds went up by 17%. So I guess am I understanding the accounting change correctly? And then was there anything specific that drove the step up in the commercial criticized classified?
spk12: I'll take a stab. This is Chris. The step up in the commercials, grade migration as we work through credits, normal customary kind of grade migration. The change in the methodology was to adopt the regulatory guidance around the mortgage credits from a substandard and the special mentions. perspective, so that's what moved those numbers. So most of those dollars went from sub to special mention in the resi bucket.
spk09: Got it. Thank you very much for taking the questions, everyone. I appreciate it.
spk03: Appreciate it. Thanks.
spk14: Our next question comes from John Armstrong with RBC Capital Markets. Please go ahead.
spk16: Hey, thanks. Good morning, everyone. Can you help us understand what's going on in insurance? I know you mentioned it seems like it's a little bit of a hard market, a little bit of new client acquisition, but 14% year over year, I'm just looking for a little more color on that and what the outlook could be.
spk17: The team's doing a great job. As we've said before, we like that business. The team's doing a great job of growing our book of business and retaining customers, so Our retention was really good in the quarter. Our new business was good in the quarter. And you add on that a hard insurance market where, you know, just like my home premium and my cars that went up in the quarter, everybody's paying more for insurance.
spk12: A bit anecdotal, but I think we're starting to develop synergies with the commercial teams and the corporate bank, too. So it's not a big move, but there's just a lot of energy in that space as we work together.
spk16: Okay. and outlook for that? Because to me, that would be the driver, right? The new business, not necessarily the hard market.
spk17: Yeah, yeah. The team's doing a great job. We continue to see ability to grow up that revenue stream, and so the team's doing a great job at growing that. We've added some producers to the team here in the last couple of quarters. They're beginning to hit their stride. We've added some market to the team. There's activity going on there that will help us grow that business.
spk16: Okay, good. This is a follow-up credit question. I don't know if it's for maybe Billy or Chris, but how do you guys want us to, or Valerie, how do you want us to think about the provision? I mean, things do look pretty clean from a credit quality point of view, but curious how you want us to think about the provision and if there's anything else out there on credit that you're watching more closely.
spk17: I think you're right. I think we feel pretty good about credit, but you guys talk about provision. Somebody.
spk12: I'll kick it off. So, you know, obviously we have a model. We follow our process. Valerie's comments were on point. We're not seeing systemic large impact on any vertical or line of business or collateral segment. It's still kind of a one-off problem credits that we're working through. So from that perspective, we're not seeing any large moves from a credit perspective.
spk01: I don't know what else to say other than, I mean, John, you followed us for a long time and we will see, we, we regularly review all of our credits, anything that gets impaired. We are early to, um, impair, you know, some of those could get worse. Some of those could get better, but you know, the ones that get worse from a corporate standpoint are going to be kind of lumpy. And we've talked about that in the past. We had one of those this last quarter. That's what drove most of the charge off. Some of that can continue. But I don't see anything systemic, I guess is a better way to answer that. Does that help you?
spk03: Yep, that helps. Okay, thanks. Appreciate it. Thank you, John.
spk15: Our next question comes from Matt Olney with Stevens.
spk14: Please go ahead.
spk06: Hey, thanks. Good morning, everybody. Just want to clarify some of the commentary on the cost savings in terms of what's incremental From what we discussed on the April call, I guess the number of branch closures are the same, but the early retirement and I think it was termed other target efficiencies, that sounds incremental. Any more commentary for us to appreciate kind of what's incremental on the cost savings plan since the April call?
spk17: Yeah, it's people. So, you know, the voluntary retirement program that we offered out, is still ongoing, and so we're working through all of that. But we expect to see headcount reduction, and we expect to see some restructuring in some of the teams that we're doing to be more efficient, and almost all of that's going to result in payroll cost reduction.
spk06: Okay. Appreciate that. And then I guess thinking more about capital, I mean, we're seeing your TCE ratio increase a little bit in 2Q. I'm sure it's not where you want to see it but just remind us how we think about or how you think about capital and as capital builds the back half you're in the next year at what capital level is there what are you targeting what we could talk more about deployment opportunities yeah again I don't know that in today's environment we have a specific target I think you're you're coming around to buyback program I think we continue to have our buyback program in place and
spk17: I don't think we'll execute on our buyback program in today's environment and at today's levels. We're growing capital, and we've got great earnings coming through the pipeline, but we need to make sure that we're prepared for whatever comes our way from an economic standpoint.
spk06: And going back to the loan growth commentary, you mentioned a significant part of the growth in 2Q is from residential mortgage and some of those arms, and you thought maybe you could – potentially sell some of those the back half of the year on your newer production if pricing improves. Are you seeing that yet in the back half of the year? Are you seeing an improved pricing, or is that something you're just still waiting for?
spk17: Yeah, no, I think we've seen what's in the pipeline has moved more to secondary market product from on-balance sheet products. So I think we feel like that will slow in the third quarter just from what's in the pipeline that hasn't closed yet now.
spk06: Okay. And just to clarify... The commentary about loan growth slowing the back half of the year, getting your mid-single-digit guidance, how much of that is just selling more of the mortgage production versus a slowdown of just more on the commercial side?
spk17: Yeah, so let's make sure we're all saying the same thing. So we would continue to think that mortgage can grow through the back half of the year at a slower pace. So what we've seen over the last year is more of our mortgage production has come on balance sheet than has historically been the case for us. You know, we were a 70%, 65, 70 plus percent secondary market production shop where we were selling things off in the secondary market. When rates started spiking up, the arm product became very popular. The secondary market for arm was dysfunctional and still kind of is, but it's improving. And so now, even though ARM is still popular, we're producing more ARM product that is secondary market going out. So the things we're closing now, more of that is going out into the secondary market than was before.
spk11: And that was an increasing trend as we went through the second quarter. And, you know, to Dan's point, it will likely see a little bit more in the third quarter. But that's not what's driving the meaningfulness and the slowness. I mean, that'll be a part of it, obviously. That's where I was going. Exactly. But not...
spk17: Yeah, the whole pipeline has just slowed down. What we're seeing coming through the pipeline from first quarter to second quarter is different, and what's in the pipeline today is different.
spk18: Okay.
spk06: Okay. Thanks for clarifying. Appreciate it.
spk03: Hey, thanks.
spk14: Our next question comes from Brett Rabattin with Huffbee Group. Please go ahead.
spk05: Hey, good morning, everyone. Thanks for the question. Wanted to first see if you had the number for the unfunded commitment change link quarter. I know you had the negative 10 million provision related to that.
spk12: I don't have that number specifically other than it's down the other way. I mean, I don't, does anybody have that? We can get back to you on it.
spk17: Yeah, there was a whole lot of unfunded construction loans coming into the year. And those loans are beginning to fund up and have been funding up throughout the first two quarters. As a construction project finishes, it moves into CRE and out of the CAD bucket. But it's also pulling off of the unfunded.
spk05: Okay. And then I wanted to make sure I understood, you know, you have a really strong consumer deposit base. And I just wanted to make sure I understood the comment around the decline primarily in corporate accounts activity. Could you guys talk a little bit more about what you saw on the corporate side and just what that change meant for the cost of funds specifically on the corporate side?
spk17: Yeah, so what you heard me say was we track ourselves off of our community bank team and our corporate bank team. The community bank team, as I said, has done fairly well. Deposits are actually up year-to-date in the community bank. The corporate world, those treasurers are looking for yield. And so we're seeing more and more people look for dollars. Mike, do you want to talk about that?
spk08: Yes. There are a couple dynamics that happen in the first part of the year. First off, you get taxes, obviously, and you also get bonuses that get paid. And we have seen that over the last 10 years come down in the corporate world. It's pretty seasonality. There's some seasonality to it. There's also, as rates have risen... the difference between paying 1% for a deposit versus paying 4% to 5% is really eye-opening from the CFO perspective. And so we're getting a lot more push to move those out of the DDA and into the interest-bearing accounts. And in addition, as we saw in March with some of the issues there, some of our clients also sought some secure positions seeking FDIC insurance or money market mutual funds that allowed us to move some deposits out to reduce some of those larger depositors. We've seen some of that come back and some stabilization there. And I am hopeful, and what we've seen historically, see some of those corporate deposits rise the second half of the year to offset some of that decline.
spk05: Okay. That's helpful. And then just last quick one for me. I know the AOCI improved a little bit. link quarter, and you guys, it sounded like you haven't been interested in doing any more restructuring of the securities portfolio. I was just curious if that mindset had changed at all and if you thought maybe that might be a use of capital here at some point in the back half.
spk17: I think it all depends on where rates go and what's happening. I mean, I don't see us doing that today, but there's been stranger things that happen in the environment.
spk11: We always try to take a look at... at the portfolio, at changing interest rates, and do what's best for the balance sheet.
spk17: The team does a great job of tracking that and monitoring that for us.
spk03: Okay. Great. Appreciate the call. Thank you very much, Ruth.
spk14: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk17: All right, thank you all again for your time for joining us today. I just want to repeat the four broad themes for the quarter that Valerie mentioned a few minutes ago, including key business development successes, stable credit quality, acceleration in funding costs, and progress toward improved operating efficiency. In closing, I'm excited about the future of Cadence Bank. I believe we are navigating this part of the cycle from a position of strength. As evidenced by our quarter's result, our balance sheet is in a great position from a liquidity standpoint. We will continue to focus on expanding our core deposit base, maintaining strong credit quality, growing our fee businesses, and taking advantage of the opportunities in front of us to improve operating efficiency. Thanks again for joining us today. We look forward to visiting with you soon.
spk15: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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