Q1 2020 Earnings Call

Welcome to the Cadence Bank Corporation 2020 first quarter earnings conference call all participants will be in listen-only mode. The comments are subject to the forward-looking statement disclaimer, which can be found in the press release and on page two of the financial results presentation. Both of those documents can be located in the investor relations section at Cadence Bank Corporation. After today's presentation. 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 all for joining our first quarter earnings call with me today or Valerie Thompson Sam and David black first. I'd like to talk about a few positives. We had a dog a good portion of operating results as measured by our adjusted pre-tax pre-provision that income which excluding the non-cash Goodwill impairment was $93 for the quarter. This is right at at 5.11% return on average assets in the quarter. So PTP was down 2% and dollars linked quarter, but flat at 2:11. So a good cork their car loan loss Reserve doubled in the first quarter and ended up at $245 billion or 1.83% The increases are attributable to Cecil Antico a capital ratios are strong or tangible Book value increased nicely from 1465 at the end of the year to $15.65 at the end of the first quarter 6.7. Yep.

an inquiry increase linked order

Also during the quarter we locked in a 261 million dollar gain on the termination of our interest rate collar, which we established back in February of 2019 and the first six months of the year like caller increased by over 100% And we lock that in which contributed to the nice increase in tangible Book value during the quarter. We had another strong quarter of good management adjusted non-interest expenses declined five million or 5% link order. This was primarily attributable to a significant reduction in the incentive accrual or adjusted affect ratio at the end of the first quarter was 49.9% or down a hundred basis points compared to the fourth quarter. We continue to have a lot of success and our deposit base off all funding costs specifically total cost of funds were 105 at quarter in and total cost of deposits 96 these represent declines of 18 basis birth.

It's quarter over quarter for each metric that a client's largely neutralize. The impact of the declining rates on are earning assets. So quarter in them was 380 a decline of month basis points, but really attributable to lower creation, excluding the impact of lower accretion and then would have increased two basis points.

Well, not a hot a hot light. I would point out that we announced a non-cash Goodwill impairment of 413 million net of tax. This is of course tied to the carrying value of our acquisition long. As you know, this impairment does not affect tangible capital or liquidity. We made the decision to reduce our quarterly dividend to a nickel per share this time. We believe this is a prudent step in a system with our historical conservative approach to Capital Management, loan-to-deposit that quarter and were 93% So really liquidity and capital look good.

Particle that are classified assets encrusted and we have good visibility to sing some reductions in classified assets coming up in the next few Quarters at this point. We expect to be dealing with credit strength resulting from covid-19 Full period of time and that will be our primary focus. I've got an extremely experienced team many of whom have been through tough down Cycles in the past and we were focused on risk management like never before clearly will experience some stress, but fortunately our Capital ratios and liquidity are strong and we're prepared to manage through it.

From an operational standpoint. Let me touch base on a few irrelevant facts. And first I'm pleased to report that at this point. None of our Cadence Bankers are known to be positive for Kovac 1100 of our 1800 banks are working from home and this transition has been much more manageable than I would have expected in a very compressed period of time we worked proactively to ensure safety of our customers and her employees and I ain't a business continuity with our mobile capabilities and quite honestly a lot of hard work and phone calls by all of our employees are branches are open a client's can't come in and see a banker mostly By Appointment customers are using alternative channels, like never before or transaction volumes of State constant. Our call centers had a few spikes here and there but we're really very manageable. And of course as you would expect the website and and other forms of interacting with the bank or they've increased significantly fluent or online product.

We have seen a surge of SBA.

Applications over 1,700 applications a billion in approvals and a full pipe line moving forward tomorrow morning special. Thanks to our Cadence Bank. We were working really nice and weekends to get these PPP loans funded as it's certainly been a large amount of volume.

So I thought it would take a moment and talk about some of the higher-risk parts of the portfolio as I know that's of interest to investors and let's start with our restaurant portfolio, which is found on page 24 month as many of you will remember this portfolio peaked at one point two five billion. If we've been reducing it over the last couple of years our restaurant portfolio stood at 1.082 billion a quarter in a slightly linked quarter due to Salon draws primarily. And so let me just hit a few of the major segments are limited service portfolio includes Kyu srma casual. It's $737 and seventy 3% of the portfolio.

So que es are consists of large multi-unit franchisees nationally recognized Brands. We have a lot of really big companies that bank with us our clients account for $75 units. It's geographically diverse and and really que es are these days especially is focused on on off-premise. So off-premise would be primarily Drive in but also delivery and pickup so off premise for this portfolio accounts for 70% of their revenue previously. And so that means their best position to deal with the quarantine restrictions are full service segment is casual dining at Family Dining is 214 million or 21% of the portfolio and we believe this is the money stress segment of the portfolio weekly sales have dropped by 60% and even more in some cases and they're just really impacted by the complete shutdown of dining rooms and having to Thursday.

So Lionel carryout and delivery. It's a big adjustment for their business models and they're labeled models later models. So a few other observations about the portfolio or found in your life, but I think it's informative to learn that 496 million or about half of the restaurant portfolio is rated into what we call strong National Brands these name brands. These are Taco Bell Kentucky Fried Pizza Hut also Wendy's and Burger King. So these are some of the most respected restaurant brands in the industry and their friends.

Pardon me just a conference operator. Can I have your name, please?

Hello. Is anyone there a portrait line? I'll do the call was your connection on me?

You are now it's reasonable to expect that these stronger Branch will recover faster, especially in light of the fact that some of the weaker Brands may not survive.

Selectivity is always been a key ingredient in our restaurant portfolio. We back 20 of the top 40 restaurant franchisee companies in the country today these twenty companies off 408 million up 41% of our exposure. They have the size of the scale The Experience. They have 12 billion in annual revenue. They have an average 350 stores per month. So the the bigger larger operators We Believe are better positioned to cope with this level of stress. So another note of relevance. The portfolio is about 153 million Pizza Sr. And is it would not surprise you pieces shown to be the most resilient segment since you know pre-crisis, it was already delivered heavily to take out and delivery and their same-store sales have really been pretty flat compared to it prior year. So that's an accomplishment and then one other note portfolio characteristic worth mentioning. Is that about a hundred and ten million of the Port Jeff?

Is comprised of publicly-traded restaurant companies which have a combined market cap currently of about 1.5 billion?

So we just want to mention a few of the factors that point to a well-positioned restaurant portfolio and clearly full understanding of recognition of the extraordinary in a risk and impact of a sudden shut down at the economy. So we're well aware that there's there's risk in the portfolio, but we think that some of the steps that we're taking to help would be of interest to you as well payment deferrals about forty four of the 72 clients 50% of the portfolio were asked for payment deferrals. We've had ten clients drawn revolvers for 5:46 million dollars vast majority of our restaurant clients have sought PPP loans from their agent Banks and we processed 147 million + PPP loans for clients, which we've used, you know, immediate credit support in the near-term. So this is the most stress segment at Cadence, but we think we have done a lot of things to mitigate much of the risk for the reasons wage.

Outlined earlier age 27 let's turn to energy and let me update you with a few facts. They're better portfolio first Midstream. It's the largest part of our portfolio. That's about 63% of the total 937 million of the funded balance. That's about 7% of the bank wide loans Midstream companies typically have fee based off of cash flow with no direct commodity price exposure. The really important point that we haven't Illustrated previously is that the average debt to cap this portfolio is rather conservative at 39% of our borrowers. The average outstanding is 12.3 million, but in this portfolio over time, we've experienced really great credit results. We've had charged also less than five million on two point two billion in loans originated. Our team is known as one of the top teams in the Midstream space we lead or agent over Thursday.

percent of the of this port

Polio and of course we're continuing to stress test the portfolio for a world with lower oil prices and I would just say that you know so far we feel pretty good about where we are and key factor in the lower debt relative to the equity. It's just a major credit plus from my point of view trying to EMP. This is now two and half percent of the bank overall recall that this was a portfolio that has down significantly from 2015. We picked it about five hundred ninety-one million thirty-eight borrowers actually back in late for Thursday, I should say and so today we have 23 bar hours and 337 million standing. We have one borrower just under twenty million. That is non-performing.

Catching provides a great deal of comfort for our borrowers and for our banks at this point in the cycle and we talked a lot of money ourselves about the duration risk being available. So in other words the hedging gives people protection to get through this. But if prices stay low longer that would mean more stress for the portfolio over time. The last part of energy is also Services. It's just over two hundred million about one and half percent of the bank total and as we've reported previously we shy away from from drilling since the company's name of this portfolio is more production-oriented which guess there will be some shut-ins but overtime production is in my view likely to resume

So we wanted to also touch base about hospitality and just see re more broadly but the hospitality slide a slide Thirty-One and so before I touch on that our commercial real estate book is approximately 3 billion in assets. We've got seven and half million non-performers twenty five basis points. This has been a very solid credit performing portfolio of a long period of time Williams to his team in Houston have had zero charge off the ordinal performers zero substandard. It's just really been pristine and the State Bank Legacy portfolio has also proved is Craig credit metrics and I know you know, that was then and this is now but I guess the the point is that not that when I would suggest there's no risk in this portfolio, but oh well underwritten ma'am. I will be able to stand stress perhaps better than others who are not able to turn in really pristine numbers as timid esteem have done. So now turning to hospitality dead.

270 million in loans outstanding eighty eight different borrowers Cadence had zero Hotel bones. This was an asset category that we shied away from and so since the merger with the Legacy State, we've been you know, typing pretty hard on the brake and and tending to reduce that portfolio, but I won't bad having said that states the portfolio was was good loan. Now you a 52% excluding SBA Loans. They have many quality repeat borrowers at this point. Roughly. A third of these borrowers have asked for payment deferrals off the next category. I'll touch base on as Residential Mortgage. We have two point six billion in Residential Mortgages on our books. I view this is a very low risk and a very conservative conservatively underwritten portfolio. Our shop is always been a paper and it shows in our results or charge also for the last eight years have been less than $500,000 on newly originated loans and wage.

That included hurricane.

Party, which was certainly a stress for the region. We have had requests for deferrals of approximately 8% on this portfolio since covid-19. And we would as I said expect us to do pretty well over time. So we hope that some of this additional details helpful for analyzing our portfolio as it relates to covid-19 and I'm sure that in future. We'll be doing more assessment wage according to you more details and more understanding if we gain knowledge about how this is unfolding.

Quickly 20/20. What's our strategy? Well, we're cautiously and prudently beginning plans to return to work. I'll tell you I for one can't wait to get back to the office. I'm just more productive their wage clearly the process will take time and it'll vary by state and and we will will not rush into anything and and safety and and you know health of our Bankers is of Paramount importance off in the meantime, we're tightening managing expenses, and we're really just tirelessly diligently working with class better understand their stress and to you know, hopefully manage through that constructively month. So we're mindful of the well-being of our employees and our customers and will continue to provide updates and how we're supporting those communities along the way with that. Let me turn the call over to Valerie and then wash perk you and I I'll have some closing comments Valerie.

Great. Thank you Paul as Paul noted our pretax pre-provision earnings continue to be strong with our adjusted pre-tax pre-provision earnings at $93 billion for the quarter back down only one point nine million from the prior quarter do to lower education as a percent of average assets. It was actually flat at 2.7% quarter-over-quarter, electing the consistent underlying earnings power even in a time of stress this strength combined with our robust Capital position and an allowance for loan losses at 1.83% which more than doubled from your end are important distinguishing factors for Cadence adjusted. Net income for the first quarter of 2020 was 12 and 1/2 million wage adjusted EPS have ten cents per share. This was down 39.4 million and thirty cents per share respectively from the prior quarter primarily due to increased loan Provisions, which were dead.

66 million from the prior quarter reflecting the impact of covid-19 as well as diesel implementation the increase in loan provision and 1/4 attributed 34,000 sense of the quarterly decline in eps.

Additionally we did record a non-cash impairment in our Goodwill of 443.7 million or four hundred thirteen million after taxes amounting to $3.26 per share reflecting all of the bank reporting unit Goodwill. This impairment was attributable to several factors including the volatility in our stock price are trading value relative to peers cash flow forecast in light of covid-19 and higher discount rates and other variables given the environment while this impairment drove the quarters 399 million reported net loss. It does not impact tangible Equity regulatory Capital cash or liquidity.

notably

Are tangible Book value of 2 billion increased 5.4% in the quarter with tangible book value per share increasing the $15.65 per share and tap common Equity to tangible assets increasing to 11:00 and a half percent our Capital ratios continue to be robust with cet1 of 11.4% leverage ratio of 10.1% Tier 1 risk-based of 11.4% and total risk-based of 13.8% Our liquidity is likewise robust wage are solid core deposit base quality and highly liquid Securities portfolio minimal wholesale funding and significant alternative sources of available funding.

Are tangible Book value increased in the quarter in large part due to our previously reported termination of our four billion dollar notional caller in early, March given the market wage T. The caller had increased in value by over 100% from your end and we opted to lock in that gain of 261 million which will flow into interesting facts over the next four years providing an estimated dollar $63 per share over that time frame.

Also importantly with the caller terminated cadences full asset sensitivity returns and in a 100 basis-point rate parallel shock scenario on a cruise net interest income over 11%

on the deposit front we continue to be very pleased with our mix and ability to strategically reposition our deposit base during the quarter non-interest-bearing deposits total deposit the total deposits increased to 27% of $126 million or 3% in the quarter Total Core deposits declined in the quarter by 4% or 636 million is we focused aggressively on lowering our deposit costs. We were effective in decreasing nearly a billion and higher dollar cost or excuse me on higher cost balances 240 million of which was a collateral deposit related to our caller determination or caller termination while offsetting that with over half a billion and lower cost net core deposit growth. And as a result for the second quarter in a row, our total deposit cost came down 18 basis points to 96 basis points, and we

Expect further declines in the second quarter our core deposits make up 96% of total deposits with broker representing just 4%

Our loan balance is increased 3% or $334 million in the first quarter with a growth coming primarily in March as draws on existing lines of credit of approximately four hundred fifty million and modest new originations were partially offset by routine paid ads.

Insecurities grew to 2 and 1/2 billion or 14% of total assets adding 93 million and a quarter our purchases over the past two quarters have been primarily in highly Liquid Agency mortgage bonds or Municipal concentration, which is all investment-grade is less than 9% of the portfolio.

On an average basis are investment Securities increased $390 due primarily to the timing of the purchases in the fourth quarter with the tax equivalent yield declining only three basis points in the quarter to age sixty-five or average interest bearing deposits declined $185 million while average non-interest-bearing deposits increased ten million from the prior quarter due to the loan not coming late in the quarter. Our average loan was declined 262 million.

If mixed shift can buy with lower accretion and one less day in the quarter led to total revenue down slightly to 188.5 million with net income decreasing 7.4 million and non-interest revenue increasing 1.2 million the decline in net interest income included a four point nine million Decline and accretion in college and one point four million declined due to one less stay in the quarter.

Focusing on net interest margin of 3.8% was down 9 basis points in the quarter solely due to an eleven basis point decline in a corporation all other movements in the quarter needed a positive two basis points. We were able to completely offset the impact of declining interest rates on our variable rate loans through our aggressive managing our cost of deposits and hedging activities, including hedging originated loan yields of Five Point 10% decreased fifteen basis points during the quarter while we rejected an eighteen basis point improvement in our deposit cost. This is the second quarter in a row where we've had eighteen basis point reduction in our deposit cost lowering our deposit, 27% over the last two quarters.

Our first quarter originated loan and deposit made as we reach 40% are hedging activities provided 7.9 million and interest income in the first quarter up 23% from the prior quarter month.

Note also that the income from the paycheck Protection Program will flow through that interest margins will see that in the coming the coming quarters based on secured funding. So how long are we currently estimate that that will be between $25 and $30 million in fees alone, excluding any net spread of the loans and sells for which for the most part are expected to be short-term.

Not interesting. Tom was relatively stable of a million two or three and half percent from the linked quarter. It included an increase of two point six million insecurities games and in case in service charges and credit related fees as well. These were partially offset by declines and investment advisory Revenue primarily due to declines of Market values and the impact of fourth-quarter games alone sold not interested, excuse me, not interest expenses were well-managed reflected in our efficiency ratio of 49.7% are adjusted expenses declined 5.8 million in the quarter largely in our compensation expenses as we lower it incentive comp and other employee of rules other smaller declines were really across the board a partially offset by an increase in FDIC Insurance of a million to is the credits we received in the third and fourth quarters of last year were no longer in effect.

to summarize

Let's see some impact. We recorded a day one allowance 75.8 million about adoption bringing our January 1st 2020 allowance for credit losses to 195.5 million first quarter. We had net charge-off the 33 million and Loan provisions of 82.2 million these charges resulted in an allowance of 245.2 million or 1.83% of loans at March Thirty One. This was an increase of 105% or 91 basis points compared to December Thirty One 2019 numbers off this doubling of our allowance reflected the day one impact, of course, which we are opting to apply the two-year deferral into regulatory Capital as well as the impact of covid-19 off and lower oil prices reflected in the pandemic economic scenario that we use in our super modeling.

Well, this has been really quite the quarter for the industry and and quite frankly for the world. We are very confident in our balance sheet and earnings positioning long as we navigate this environment. We had a significant Capital cushion strong deposits and liquidity meaningful inherent pre-tax pre-provision earnings power off a disciplined and leaned expense space a solid net interest. Margin that now has the locked in game from our caller as well as renewed full asset sensitivity and importantly resilient employee base that is demonstrating daily their flexibility and commitment to do whatever it takes to get the job done for our customers a.m. For our shareholders operator. I think we would like to open it up for questions now. Thank you.

Ladies and gentlemen at this time will begin the question-and-answer session to ask a question. You may press star and then one on your touch-tone phones. If you're using a speakerphone, we do a song please skip your handset before pressing the keys to it's all your questions. You may press * + 2

once again that is star and then one to ask a question will pause momentarily to assemble the roster.

And our first question today comes from Jennifer Denver from SunTrust, please go ahead with your question. Thank you. Good morning.

Hi, Jennifer.

Thank you for going through all the greater risk portfolios given the pandemic are there any other loan buckets for Cadence that maybe investors might not be thinking about that you're seeing greater risk in with and they could be very small exposures for you. But that where you're seeing maybe higher deferral request than you might of guessed.

Jennifer of the only other category that comes to mind would be Healthcare as you know, we're roughly five hundred million and Loans outstanding. There are about a hundred and fifty million of those would be took a jurors that are you know on hold for the moment. So I believe that that portfolio will be more v-shaped, you know, these are things that are being deferred and we'll have some pent-up demand. So we we do see some stress there but feels like that's pretty manageable and I don't know saying what you add anything to that. I know you're close to that portfolio. Well Jennifer that as you can imagine opthamology dental urgent care outsourced clinical like anesthesia Radiology all that has been you know, kind of put on pause and you know, we do have some others in that in that space. Paul said it well, I do think we'll have a a v curved kind of rebound on all of this but I mean cuz cataracts don't don't fix themselves and so, you know Thursday.

This is a strong group of clients. Most of which have a

Plaid and and been accepted for PPP funding good private equity and sbic backing. So I think they're stressed in the near-term but not in the long term.

One other question for the charge-offs you had this quarter. Can you just give us a little more detail on what those included for the general and I portion of wage.

Sure, David, would you take that one?

Be happy to Paul good morning Jennifer. So the the thirty two million in total charge off of 99 basis points on an annualized basis basis of what's going to really about eight credits, um, one energy Three restaurant and and for General cni the general see and I the two largest of the general know what won't different sectors they both had a consumer discretionary component to them and as as we came to the quarter in office from Outlook perspective, I would say the the severity was definitely impacted by the the the more bearish macroeconomic Outlook.

influence the charge off total

Okay. Thank you very much.

Our next question comes from Steven alexopoulos from JPMorgan. Please get on with your question. Hey, good morning. Everybody morning to start off levels are very strong Reserve doubled over the prior quarter. Well, what was the thought on reducing the dividend here? And why is $0.05 a share of the right level?

Yeah, I'm Steven. Of course, you know, we considered several different ways to approach it as we mentioned in in our comments. We've had a historically a conservative approach to Capital were times when you know people thought we should be aggressively buying shares back and and we were conservatively buying a few shares back. So I think it's just more in line with with being prudent and being conservative with respect to Capital and you know credit stress is obvious and you know, there's a lot of numbers that I could have argued for I could have argued to leave it where it is. I just felt like we wanted to make a a reduction. It's a meaningful reduction to be conservative but still pay at least, you know, some some cash dividend. So I wish I could tell you there was a highly scientific answer to how we got to a nickel but but it's not it's just a a judgment call. Okay.

That's fair pull on the criticizing classified loans. I was surprised we didn't see a more notable jump in the balance is particularly for segments such as restaurant is that because of the deferrals being provided?

Stephen no.

I don't think so. I think that you know, the covid-19 packed was really late in the quarter and I think that you know, what we'll have to get more information about the portfolios are doing to to look at whether you know additional increases or or or I mean the magnitude of the additional increases obviously, we'll see some but I think it's just too soon to recognize those at this point. Okay? And what was the balance of loans that you did provide deferrals in the quarter? What was the total?

Okay, but do you have a kind of a banquet total? There was one point two billion or $1,134 that we provided deferrals on Thursday. And then and finally just look at the energy portfolio the reserve they are 1.6% It seems very low. We have Banks recording energy reserves in the five to ten percent plus range give some color. Why why is that reserved level sufficient particularly with Cecil now live? Thanks. Yeah. The first thing is is the Midstream portfolio again, as I mentioned in the comments just contracted cash flow. It's 39% loan to debt to cap. It's a great performing historically it's increased stress, but it's the vast majority of our portfolio and we think it will continue to do. Well the EMP portion does have a higher reserve and you know, we got good hedging in place and one credit that's on the wage.

Performing list, you know, I think it's appropriate for where we are today.

Okay. Thanks for taking my question. This is Valerie. I might just add real briefly on that wage as well as in the energy when we went through our modeling on see so, you know, there is we did layer on both qualitative and environmental factors specifically to those those aspects you mentioned really simply to you know to kind of supplement the modeling in the modeling we use with the pandemic modeling as at the end of March so really the most up-to-date information that that was available at that time, you know as as you know, everything changes from day-to-day lately, so things will certainly change as we go into the second quarter should be seeing how but but that was basically cut about the premise behind how we how we put this in the model and model it out. Okay. Thanks Valerie. Thanks everyone dead.

That's it.

Our next question comes from Brad Millsaps from Piper Sandler, please go ahead with your question.

Hey, good morning morning Brad morning Valerie. I think you just touched on a little bit was just curious kind of the assumptions you use and develop they you know, your Cecil assumption. It sound you can use late March or just kind of curious. If you know that kind of was you know, the most punitive sort of Outlook, you know, kind of compared to maybe what you said early April just kind of any additional color there on on kind of how you came up with the numbers you did and one Q

Yeah, absolutely. So

Um, you're right. We used the uh, we are Moody's customer. We use Moody's in our Cecil analysis and we use their their pandemic scenario that was released the first choice of April as of March 31st. And so that's what we used in the quantitative before we later on qualitative and environmental and it you know, then we also ran you know, the one that was slightly better into that were worse really to kind of give us the borders and the guidelines around which we applied the environmental and qualitative. But just for a couple of the assumptions that that are included in that it assumes, you know, obviously covet impact 3 2 8 million us infections with you know, the infection speaking in May a bathing by July. It is Faith and you know the fiscal stimulus in the second quarter not not this latest round, but it does assume that that was in place as of the end of March. It assumes the GDP would be down by 8.

Percent in the second quarter recovering a little bit to 11% in the third quarter. But but slow growth acceleration really beginning in late 2012 likewise on the unemployment. It assumes a peak of unemployment of 9% of the second quarter and then it sustained at 6 to 7 % until 2022 and and no return to Full Employment until 2023. So it's a fairly drawn-out recovery scenario. So we believe it's it's pretty conservative. And then like I said, we actually layered on some additional qualitative and environmental on top of that and you know at 1.83% on an overall basis, you know feel pretty good at March Thirty One Like I said before, you know a second quarter will have a whole new set of assumptions and we'll go from there, but we feel very good about where we were at at the end of March.

Just just curious to if you could disclose, you know, maybe what the reserve represents today kind of as a percentage of, you know, kind of what severely adverse, you know stress test from Red Letters would be in terms of overall charge-offs.

Yeah, we actually we actually never had to do it just the timing of it came over ten billion and and when that you know decided so so we don't really have that what I will say is is we've done obviously a number of stress tests internally really kind of slicing it every which way you can and you know that that's what really gives us the Comfort to say that you know, how does the things that that Paul and I both mentioned in our comments is just you know with our Capital with our earning underlying Thursdays abilities, we we feel very comfortable in you know, whenever this throws at us at least as much as we can anticipate this point in time, but yeah, we're we actively sought to stress test, you know got to be prepared for everything so that's what we do

Great. Thank you.

Our next question comes from Matt from Stevens, please go ahead with your question. Yeah, thanks for taking my question. This is t'pol I think Paul in your prepared remarks. I believe you made some comments around credit that showed signs of stabilization in the first part of the quarter before the covid-19 issues hit in March one, if you could go back to that and just give us an indication of which which Industries which sectors were were showing signs of stabilization before March. Thanks. Yeah. Thanks Matt. It was off with credits that David mentioned in his comments, you know credits that had shown improved operating results or building up cash, you know one company was in the early phases of Life under a letter of intent to to be sold and and Kobe comes along and you know, their business models go inside out overnight and they go from you know on the watchlist birth.

Grade two on the charge off list and pretty short period of time so that's there are two examples and then just more broadly if you just you know, look at economic activity you age of quarters off to a great start for the Cadence Bank portfolio, and we see, you know, a number of companies that were on the watch list for upgrades and and much fewer on the watch list for downgrade off credit Trends. I believe that things had crested and we were seeing broad-based Improvement prior to covet

Okay, that's that's helpful. And then on the energy side, you mentioned the hedges give you some comfort near-term in the e&p portfolio. She can you expand on this and and and what level of Hedges do you have? And when do these Hedges start to roll off? Just trying to appreciate when that Comfort would slow if if current commodity prices continued for a while?

Yeah, so we anticipated questions like this and really given a lot of thought to the best way to answer it and it's a little bit of a hard question to answer so I can tell you that ninety percent of our borrowers hedging for the next year, you know, it drops in future here, but it's it's not a it's not a static in other words people are putting on Hedges now and may I take them off next quarter and apply the proceeds to reduce the debt. And and so what I think is important for investors to understand is the spot price of crude sort of gets all the address but are Barbers are able to sell their production. They're big semper of twenty production today at I don't know $28. I don't have the curb in front of me, but it's it's not the, you know, the $12 that you see on the screen and so between the forward curve and hedging and modest debt levels e&p portfolio overall. It's going to see yep.

additional stress we did that and

And and that's why I didn't mention in my prepared comments. It's really a lot about the duration. So what we know is that rig count has come way down depletion is a real thing off line curves will happen and at some point prices will improve and drilling activity will resume you must be present to win. So I do understand that the bathroom and disruption is significant and unprecedented. But but working through this portfolio the head just give you know, our borrowers and our bank really a lot of protection for the long-term. So maybe part of the answer to your question is, you know a year or so, I feel pretty good if prices stay at $14 for three or four years, I mean wage that would be very challenging for the whole industry. So but I think had you protections for the for the next year feels meaningful to me but still strong

Got it. Okay, that that's great. And then I guess the last question for me is it would be for Valerie and and they're on operating expenses. It looks like the one, it's were below forecasts. I think I heard you mentioned. There was some lower incentive comp in there and and lower accruals elsewhere. How should we be thinking about the the run-rate more near-term?

Yeah, so I would say that. Yeah, we've adjusting for what we said at the end of the year. I now I think that it will be pretty flat from the from the first quarter that being said if things start to get, you know, the overall economic environment gets even worse than what we expected and projected then we've got levers that we could, you know, take further actions and not even further, but right now I'd say expect pretty flat expenses from the first quarter. Thank you.

Once again, if you would like to ask a question, please press star and then one to withdraw your questions, you may press star to our next question comes from John Armstrong from RBC Capital markets, please go ahead with your question. Hey, thanks. Good morning. John a few follow-ups here. One was on restaurants off. One of the disclosures you had is that 50% of your outstandings had requested loan restructures curious. If you have any view on the other 50% off, is that are they just with another bank or are they strong enough or they've given up hope? Can you give me your opinion on that?

Hey John, this is Sam. So yeah, I mean, I think really the answer is that they're a lot of them are are you know have have deep enough Pockets publicly-traded, you know have have the wherewithal to Thursday to make it through. And so yeah, I think that's really what we're looking at is typically, you know, ninety-day deferrals and and a lot of our restaurant customers have qualified for a refunding either through us or through their agent bank. And so, you know, we're it's it's a large number of our clients for sure. But again that that kind of points back to the Paul's earlier point out that we Bank twenty of the top 40 franchisees of major major brand names really strong franchisor support that are that are providing royalty deferrals wage deferrals required capex for expansion or remodel the franchise owners are really coming in strong to to support these guys.

Okay good and then just a little Nuance done that.

Full service and other is about 25% of the book you kind of touched on it, but it feels like that's probably the last to recover. Maybe could you touch a little bit on the health statistics you have on that portion of the book? Yes. So on the the full service, it's really kind of broken down into two categories of John one is is casual dining that would be in the neighborhood of of you know, Chili's Applebee's those sort of Brands, you know, full sit-down table-service with alcohol and then you've got the family dining which is going to be the same lower price point things like Denny's and IHOP and and huddle house and we our view is that the the casual dining space is going to probably be the most stressed because you know, they just have a higher higher cost model higher higher labor model and and just with the the significant drop in in revenue and toggling to own no.

Takeout and delivery. We think though that group is going to struggle the most and the family dining side, you know, our borrowers are larger stronger ones of large publicly traded well capitalized company that even if the dining room is shut for a bit. We think that that that group is going to rebound, you know, pretty pretty nicely. The other category is is is very small but it's kind of like she Door restaurant businesses for example, in in in grocery store. Sushi operation would be one and that's really has done quite well through this gift of all the traffic in the in the grocery stores.

Okay, good. Just two more topics. I want to cover Paul. This one's for you back on Steve's question on the dividend. I thought it was a good one. It's a you know a little tougher but you know, you stocks it 6 and 1/2 and tangible book is over 15 and you know clearly the market is same something on expectations for credit off the same time. You have a very sophisticated board and obviously when you think about the dividend maybe it's obvious that it was cut but the fact that you didn't go to a penny or zero might be saying something. I know you said it wasn't scientific, but can you just go back to that topic and maybe address it a little bit more in terms of capital and especially in light of the fact the view of your stock price versus your you know tangible book.

Yeah, John. So yeah, I think there are a couple of things there. I mean our our Capital ratios are healthy or comfortable and Outlook and pre-tax provisioned growth provides us with a meaningful, you know, first first line of defense, so to speak from a kind of Capital Management standpoint when I I look at where we are. It seems like a prudent step but I you know, hopefully we'll see more certainty around the future of all these businesses as people start to return to work and and stabbed, you know is introduced and and I would expect you know future periods. We would take a look at this for improving the dividend as as we go forward. But but the, you know, the amount of uncertainty that there is is it's hard to nail down. So I think it's a conservative decision and in line with how we have historically approached a Capital Management.

Okay, this is Valerie. I would just add to that, you know.

Had to kind of be overall conservative approach which is you know, how we've always operated just you know, we continuing to support our customers continuing to provide blending obviously all of that factors into it as well that you know, as well as all the other factors that that's all measures like I would actually do it more favorably it's not, it's the fact that it didn't go to zero one that's interested in. Yep. Okay, and then um hanker Sam maybe your Paul but you know, this is early and maybe you can answer it wage. Georgia seems to have reopened they're starting to reopen and I think Texas is slated for Friday. I know it's very early, but what do you seeing and what kind of expectations do you have? This thing's reopen judging, you know bigger picture.

Thanks.

I'm comment and invite others to also, you know, it feels like it's going to be well-managed. It's going to be thoughtfully done. There's going to be social distancing wage. I think they're people are ready to begin somewhat of a semi normal routine and I'm take Houston. For example, there have been remember exactly. Yep. Five deaths from covid-19 out of six point three million people, you know, the the really the the cases that that the people that have died tend to have had other health issue a high frequency of those cases. So so I think there is a sense that it's it's manageable and it's prudent and people want to begin to presume a somewhat normal life albeit with a in a very protected manner so but Hank, I'm sorry. I thought you were getting comment also.

I was good at I was going to let Sam take the floor and I was going to finish up to see how much you go ahead and comment.

Sure. So John, the I think the story in Georgia has been kind of overblown in the National media. It's really been more of a very soft kind of reopening. And so you're seeing something too but restaurants, you know, they they're allowed to open. They're they're taking their time opening. You know, our Approach at Cadence is going to be a very thoughtful slow phased-in approach as we think about, you know back to the office getting back to work and you know, frankly regardless of the state. I think this is all going to be a real interesting exercise in human behavior, because when you think about some people are just anxious about business owners when you get crank back up, but people some people are still just very fearful of being in any sort of crowd even three or four people and so they can take a little bit of time but but but gradually dead we'll we'll each of our markets will get back to to some semblance of normalcy. Although I don't see that things like restaurants and retailers are going to be have hundreds of people in them over the next month or two.

So I would Echo those comments and and I would say that you know our Workforce as they're ready to get back there also are cautious. And as Paul mentioned we have 1,100 folks working on VPN. A lot of Lifetime right now is being spent with our clients and working through the PPP process and really getting those clients. And in addition just getting you know feedback on a weekly daily basis would make sure that we can meet the needs of our clients are folks are active and they're engaged and but I do think it's going to be cautious as we re-engage.

Okay. All right. Thanks.

And ladies and gentlemen at this point. We will end today's question-and-answer session. I'd like to turn the conference call back over to Paul Murphy for any closing remarks great. Thank you all for joining our call and closing just a couple of thoughts. I would leave you with first off. We really have a good franchise. Our core earnings strength is good and our Capital ratios are solid. We have a diverse deposit base that's attractive and liquidity is a big positive force. So we're in some really good markets and our our team is is fully committed I can assure you so we have some credit challenges last year. I get that weird things have begun to see Improvement that was encouraging and now this Global pandemic is clearly a challenge. So we of course for see the the foreseeable future is going to be rough. We're going to have some elevated provisions and I'm not, you know the type to give the let's go win one for the Gipper closing comments, but but I will tell you that we truly have a great team.

We've been through Cycles like this before but we we know what to do and we have the resources. We need to manage through this. So, I believe that patient investors will be rewarded and I can promise you this team is working hard to do a good job for shareholders with that. We stand adjourned.

Ladies and gentlemen that does conclude today's presentation we do. Thank you for joining. You may now disconnect your lines.