Q4 2020 Cadence Bancorp Earnings Call
Welcome to the cadence bancorporation fourth quarter and full year 2020 earnings call comments are subject to the forward looking statements disclaimer, which can be found in the press release and on page two for the financial results presentation. Both of those documents can be located in the Investor Relations section at cadence Bank.
Corporation Dotcom, all participants will be in listen only mode.
After management's opening remarks, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn to capital went to Paul Murphy Chairman and CEO. Please go ahead.
Good morning, and thank you all for joining US joining me today on the call are Valerie Sam Hank and Billy Braddock earliest familiar to many of you, but not all of you. He is now serving as our chief credit officer. When we started cadence for 11 years ago barely goes from one of the first people I asked to join me at least a 26 year veteran of Bang.
<unk> in business in Houston is very disciplined in his approach to credit piece thorough has a great <unk> for details let me ask the confidence of the senior management team and our board and this is a perfect fit to see him step into this important role Billy is a real team player.
As we look back from 2020, certainly was challenging in many ways, but on the other hand, we feel pretty good about many aspects of our performance and have a real positive outlook towards the future.
We continue to report on attractive P. PNR in core NIM our day.
Posit franchise improved significantly in 2020.
We materially increased our reserves.
Enjoyed very strong capital and liquidity position. So cadence today is really well positioned to move forward in 2021 IMAX.
I'm extremely grateful to our hard working dedicated team of bankers and feel good about the markets, we operate in and cadence balance sheets sheets really in great shape.
So as a result for the many positive developments in 2020, we plan to resume our share buyback increase the dividend to <unk> 15 payable February 12, and we plan to reduce maturing in callable debt for.
For quarter was pretty solid from an operating perspective and showed encouraging improvement in credit as well personal and operating highlights for quarter PPR was $260 million, which includes 169 million in accelerated hedge revenue. So normalizing for that we get to <unk> $91 million for.
For the full year, <unk> $373 million, which would be a 2.06.
PNR are away.
In normal times, we'd be pretty pleased with that number but I would say, it's a bit more noteworthy given the pandemic.
NIM continues to be a good story increased five basis points to $3 50 for linked quarter.
Most of that is driven by tightening of our deposit cost.
I am pleased with them.
I mentioned credit metrics improved broadly on our fourth quarter is our second consecutive quarter in which NPA as criticized and classified loans declined this quarter down roughly 20%. So that's good progress at least going to share his perspective on credit later in the call.
For the year net charge offs for 79 basis points, and our ending reserve, excluding PPP loans was $3 one 2%.
So we saw improved credit metrics and restaurant energy and C&I portfolios.
Oh, only hospitality saw some modest deterioration linked quarter.
Excluding hospitality, our CRE credit metrics for outstanding and as is true with our mortgage credit metrics really good numbers there.
So as we think about future growth you know the headwinds that we've experienced for the last few periods here, meaning the decline in restaurant and energy portfolios or fading as those portfolios were pretty close to being appropriately sized.
Also the headwinds from just the softer economic backdrop of moderating and many borrowers remain conservative.
Vaccines spreads there seems to be some.
Reasonably optimistic reached some reasons to be optimistic about about 2021.
I guess a question on many bankers get these days about the loan growth for some of them are of course, it's still hard to answer with certainty, but it does feel like the second half of 2021, we should see.
From an improvement in gross out outlook for growth.
So today, our capital position is very good shape I'm really proud of the decisions that we made prior to and during the pandemic to ensure the strength of our bank.
At our for primary capital ratios each of them are up meaningfully over the prior year and a.
A highlight would be CE tier one and tier one both ending the year at 14% up 250 basis points.
So last for tangible book value to end at $15 83 up 8% extra.
Extremely challenging year.
A noteworthy accomplishment.
So to summarize.
All things considered we're pleased with our execution proud of our employees rising to the challenge with that I'll pause and turn it over to Billy.
Yes.
Thank you Paul I'm happy to join the call.
As Paul noted and you all know 2020 was a challenging year and while there is still much uncertainty we're happy to report that credit continued to improve over the fourth quarter.
From a broad perspective, our charge offs for the year were elevated but at a manageable level given the COVID-19 impact our criticized levels have shown improvement in our most stressed categories are in generally a better position, but we still got a really watchful eye on those.
Let me start with net charge offs for 2020, which totaled $106 million or 79 basis points of average loans reserves ended the year at a total of $367 million or three 1%, 2% net of PPP.
Nonperforming loans were 1.17% net of PPP.
The vast majority of the charge off rate or fully or partially due to the COVID-19 impact.
Covid related deferrals on a related note has continued to fall to $135 million as of January 15 to 21 down from $376 million at September 30 for 'twenty.
We look at credit migration over the fourth quarter. The trends are improving specifically nonperforming loans declined by over 27% on a linked basis and by 39% when compared to second half of 2020, the first half of 2020.
If we turn to our pool of criticized loans. The trend is similar with the pool's shrinking about 20% to $872 million, which was driven primarily by upgrades and pay downs. In fact, just 10% of the sequential decline in criticized pool was driven by charge offs.
By category restaurant energy and general C&I made up the lion's share of the positive migration in a pretty even distribution between the three portfolios the.
The only category that saw an uptick in criticized for hospitality, which I'll speak to in more detail shortly.
As we've done in previous quarters, let me quickly give an update on a few of the portfolio's first our restaurant book include excluding PPP declined by $161 million or 16% year over year $837 million portfolio remains 75 per cent quick serve and fast casual.
Which continues to perform well to the pandemic.
The $156 million full service dining segments remain the most stress segments of the portfolio.
Charge offs for the year were $33 million or three 5% of average lodge excluding PPP.
Reserve for the portfolio was $53 million or six 3% for the total portfolio, while not specifically allocated this reserve would cover 34% of the full service stress more stressful service dining segment.
Nonperforming loans stood at six 4%.
On energy the overall portfolio declined 13, 5% or $193 million from last year to $1 3 billion net of PPP.
The more stressed E&P sector had the largest drop at 25% for the year and now makes up 20% of the energy portfolio, while midstream makes up 65%.
Energy charge offs for the year were $16 $7 million or 125% of average launch.
Our reserves against the energy portfolio stand at two 6%, excluding PTT and nonperforming loans are at one 6%.
For the broader C&I portfolio charge offs for the year were $46 million or one 2% of average launch.
Our reserve against the C&I portfolio stands at two 5%, excluding PPP and nonperforming loans are at 90 basis points.
Now on the CRE hospitality segment. This is the portfolio that is under the most stress at cadence.
Valeo now stands at $257 million.
These these hospitality charge offs for the year were $2 $9 million or one 1% of average loans here too. We believe the bank is in a good reserve position with $50 million or 20% against the portfolio of $257 million non.
Nonperforming loans stood at 90 basis points.
A couple of higher points here on the CRE, excluding hospitality and on residential mortgage as Paul mentioned.
Some of the stats behind it are the CRE portfolio, excluding hospitality ended the year at 265 billion with only 46 basis points of nonperforming loans.
Outside of the hospitality described earlier credit performance.
It's hard to complain about today in this sector.
Comparable stats can be said for our $2 5 billion dollar residential mortgage book of business.
These teams of bankers have really navigated 2020 quite well.
So overall as Paul mentioned, the bank has come a long way in the past year from a credit perspective, and there's a lot to be cautiously optimistic about with cautiously being the operative word as we look into 'twenty. One we remain vigilant on credit we're encouraged by the trends and we look forward to a return to a more normalized credit environment.
With that let me turn the call over to Valerie.
Thanks, Kelly good morning for the fourth quarter, our adjusted net income for $200 million for $1 57 per share elevated over the prior quarter. Adjusted net income of 51 million and 47 per share due to lower loan provisions and accelerated hedge revenue recognized in the fourth quarter.
A partial hedge ineffectiveness termination I will come back to the hedge revenue in a moment.
The fourth quarter loan provision of $2 8 million down 30 million from the prior quarter and reflected improved credit migration and the meaningful declines in criticized and nonperforming loans.
For the loan provision was materially less this quarter given the continued uncertainty in the environment our allowance for credit losses remains robust for $2 eight 9% for $3, one 2%, excluding PPP loans, representing an ACL to nonperforming loans coverage ratio of 266%.
Turning to the balance sheet loans at 12, 7 billion declined $747 million during the quarter or $629 million, excluding PPP loans.
It's over $1 billion and funding for originations in the quarter were more than offset by Paydowns and payoffs.
At a high level the pay downs were the result of a number of factors borrowers sales of assets ex.
Seth borrower liquidity refinances to other markets and strategic exits of certain credits strictly.
Strategic production from credit payoffs and Paydowns of 113 million in criticized loans.
94 million and leveraged loans without modifiers $120 million of restaurants and $80 million in energy note that there are some overlap between these categories.
Deposits of $16 1 billion continued to grow during the quarter up 266 million from the linked quarter. While at the same time, our cost of deposits continued to fall down to 25 basis points for the quarter compared to 32 basis points last quarter.
Our non interest bearing deposits ended the year strong.
$5 million or over 31% of total deposits up from 26 per cent a year ago.
All in all it has been a great year for deposit competition at the 1 billion three with cost of deposits down 89 basis points year over year and an improved mix.
Given the quarterly growth in deposits and declines in loans, our balance sheet liquidity continued to grow with loans to deposits ending the year at 79%.
We did add modestly to our $3 3 billion.
Okay.
Okay.
With the remainder for liquidity, adding to our cash balances of $2 1 billion.
The securities portfolio now represents just shy of 18% of total assets. We may continue to increase modestly, but we don't plan for it to become much more than 20 per cent of the balance sheet.
Accordingly until net loan growth rebounds, we do expect to continue to hold excess liquidity on the balance sheet.
Net interest income increased by $2 8 million in the quarter to $157 million driven by a $3 3 million increase in loan fees due to loan payoffs.
Lower funding cost offset the impact of lower average loans during the quarter.
The fourth quarter loans anything quite at $4 $7 million in PPP loans.
Up $1 three from the prior quarter related to the $118 million of forgiven or paid off PPP loans for the fourth quarter.
Remaining unamortized PPP loan fees were $8 8 million at year end with the vast majority of that to be recognized in 2021.
Net interest margin for the quarter improved by five basis points to 354%.
On interest, earning assets remained stable at 385 as of my own fees start to offset lower average loan balances.
Partially offset by lower securities yields during the fourth quarter purchases and the impact of increased short term investments, earning 18 basis points.
Cost of interest bearing deposits declined to 51 basis points from 59 basis points in the quarter as we continued to make progress on lowering our deposit costs.
Ending the quarter at a record low of 25 basis points, a decline of seven basis points linked quarter.
Splitting the impact of the PPP program, our NIM remained flat from the prior quarter.
Net clarify our collar income and the accelerated revenue reflected in the fourth quarter. As you recall, we have been amortizing from OCI into interest income the 261 million caller gain we captured in the first quarter of this year.
As we reported in an 8-K earlier this month declines in forecast hedge eligible loans, which resulted in a determination under hedge accounting called partial and effectiveness.
Resulted in $169 2 million of that can be brought forward into fourth quarter 2020 earnings.
This 169 million accelerated had share then it was reflected in non interest income.
The effect of amortization of the hedge gain has and will continue to be reflected in interest income.
Specifically, the 261 million total game, we have recognized 226 million tier in 2020, with 169 million and noninterest income and 57 million and interest income.
And we expect 34 million of the remaining game to flow into interest income during 2021, and the final $2 million in 2022.
I realize this is a bit complicated, but the bottom line up at all as it drove the meaningful increase in our capital be right here.
Adjusted noninterest income in the fourth quarter was also impacted by this accelerated hedge revenue at $208 4 million up from 33 million in the prior year.
Our net increases in all other noninterest income categories was $6 1 million up 19% compared to the third quarter.
This growth included quarter over quarter increases of three 6 million and earnings from limited partnerships.
7 million in investment advisory revenue impacted by market performance and <unk> 6 million in credit related fees.
Adjusted Noninterest expenses were 100 from 5 million in the fourth quarter up $12 6 million common.
Paired to the linked quarter the fourth quarter expenses were elevated due primarily to an increase of $8 1 million.
Personnel expense driven by year end adjustments to incentive accruals as a result of improved credit and corporate performance in the quarter.
Looking for 2021 compared to our full year 2020, adjusted noninterest expenses for $378 million, we are expecting a low to mid single digit annual expense growth doctrine, and a return to a normalized level of business development related expenses, while continuing our long standing expense discipline.
The reported full year and fourth quarter 2020 efficiency ratios for both positively impacted by the large accelerated hedge revenue.
But before that positive impact both periods reflected slight increases.
Full year at 53 per cent and fourth quarter and 53, 7% the full year increase reflects lower revenue from 2020.
And the linked quarter reflects the increases in the fourth quarter expenses.
Turning to capital all of our capital ratios increased meaningfully this quarter due to the increased earnings and lower risk weighted assets.
At December 31, our common equity tier one and tier one ratio swept up 14% and total capital was up to $16 seven per cent.
The leverage ratio ended the quarter at 10, 9% and our tangible common equity to tangible assets.
Further to 10, 7%.
These robust levels of capital along with improved credit metrics allowed.
The flexibility to be more proactive on the capital from MIT the capital plans pulse that she previously.
Looking back to the uncertainty that we all had in March of this year I don't think we could have anticipated wrapping up the year arguably stronger than we started it.
We ended the year at $18 7 billion with a very strong balance sheet, including a loan portfolio, reflecting lower risks and improve credit characteristics.
Our robust allowance for credit losses, excluding PPP of 3.12%.
Earning assets at stable organic yields funded by a record low cost core deposit base and substantial regulatory capital buoyed by our successful hedging activities during the year.
And importantly, our tangible book value increased 8% during what was undoubtedly an unprecedented and volatile period.
As we look forward to 2021, we are encouraged by the opportunities we have to build on this foundation returned to a more normalized credit and business environment and grow shareholder value.
Let me turn it back to the operator for questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing need.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Yeah.
The first question today comes from Jennifer Dunbar of true. Please go ahead.
Okay.
Thank you good morning.
Good morning.
Valerie said Youre looking forward to a more normal credit and business environment can you talk about.
What kind of charge off levels, you think could happen in this year I know, it's really still difficult to predict given the pace of recovery.
Certain still and then my second question is you said you had about $1 billion in loan originations during the quarter can you just talk about what that consisted oven.
What kind of opportunities you're seeing right now for lending.
Sure.
Thanks, Jennifer.
I would say first off debt I would expect charge offs to be less than last year.
Yes don't still elevated.
A lot of the risk in these credit excuse me, we filled has been identified and reserved for for the most part.
But as we work our way through the year it should be a better year from a charge off standpoint that would be my expectation.
The $1 billion in growth was pretty diverse pretty broad base as you know we have 190 lenders.
Great region of the country that is.
Doing well relatively speaking coping with the COVID-19 better than some other areas and so.
Real estate in particular had a nice share last year really great growth there.
Portfolio that's been.
One of the hallmarks of that portfolio has been very credit metrics as was mentioned in the prepared remarks. So we feel good about that we're starting are called Blitz here in the first quarter, we're gonna bankers all over but we were a bit on defense last year and so we just went out hitting as hard we were focused on credit as appropriate.
We're turning back to a more offensive mindset.
We will have a program or bankers get points for making calls to keep also on the call you get more points take your boss's boss and so we're just we're at our post we're doing what we do we're knocking on doors, but good proposals in front of good companies, but thank you.
It will pay dividends.
Hard to pinpoint exactly the inflection point, but.
We've said for some time now the outlook for the second half for the year.
Encourage.
Thanks, so much.
Yeah.
Next question comes from Brady Gailey of <unk>. Please go ahead.
Hey, Thanks, good morning, guys.
Good morning Brady.
But I wanted to hit on loan growth Thats great.
Hear your optimism about loan growth from the back half of this year, but.
Between now and then do you think we should expect to see the.
The same shrinkage in loans that we saw in the fourth quarter.
Randy My answer would be probably not I mean fourth quarter had some unique things.
We had the mainstreet program that paid off from deals. We had this intentional reductions in energy and restaurant that are substantially complete now we had really a combination of a variety of things I mean still the whole COVID-19 impact and it seems like all of those things are fading a bit so I would expect it not to.
Sharp linked quarter.
But really I would just add debt.
Keep in mind that we do have the PPP loans, which fell by over $900 million of those there.
To be forgiven at some point.
Yep Yep, and then Valerie just an outlook on the margin I know you have you still have some accretable yield that's flowing through there and then now.
Obviously, it changes with the acceleration that happened in the fourth quarter, but maybe an outlook on the margin.
2021.
Yeah sure the merchant.
Definitely impacted by it.
By accelerating Cala revenue and so we've laid that out for you pretty clearly on slide 17 in our slide deck, you haven't seen that but at a high level summary.
We had about $63 million and income from the caller. This year in interesting comments. When you go down to about $32 million next year. So clearly that's going to have an impact you mentioned the accretion is going to kind of.
Just kind of gradually decline similar to how it has in the past.
But on.
The rest of the margin, it's really going to be dependent upon the timing of that loan growth.
We've had huge success in our deposit cost this year and there's still some opportunity for those to come down a little bit further as we go into the year. So we'll we'll continue to see positive movement there.
But we've got you know when we ended the year with $2 billion in cash on the balance sheet.
And that's a whole lot of excess liquidity, earning 18 basis points. So we're ready to leverage that into more earning assets. When the time is right and so.
That's really going to be the biggest dynamic and.
Margin sits.
Okay, great. Thanks, guys.
The next question is from Ken Zerbe of Morgan Stanley. Please go ahead.
Alright, great. Thanks.
Two questions. So I guess the first one it's good to hear you guys talk about buybacks, obviously with a 14% Steve tier one ratio. It looks like you have a lot of slack.
The flexibility to do buybacks can you just talk about.
Sort of how much you're thinking like what what is an appropriate amount and it does sound like it's for starting the first quarter is that right.
Yes, Ken that the expectation would be that we would start as early as the first quarter.
What the board has approved thus far is a 200 million total buyback and the pace and timing of that is something that we will.
Play a buyer, we don't have a deadline or a fire drill but the.
But you have known for us to be conservative with respect to capital and that will continue but yes. We all agree there is some room there.
Got it okay, great and then just maybe one for Valerie.
Specifically on the loan yields.
Some there was some benefit to loan yields from the PPP fee acceleration.
But it still looks like loan yields were up.
From a quarter a little bit can you just talk about why that might have been the case and how you see loan yields specifically trending over the next couple of quarters. Thanks.
Yes sure.
And you're exactly right. We did have a nice amount of lumpiness come in this quarter about 10 million in total part of that and the P. P. P. Drip and that's really part of that being related just to our own portfolio when you strip out.
Oh that when you strip out the PPP impact the accretion.
That the collar impact and and the fees you get to really kind of a base portfolio yield at $3 67 for our loans. What we saw in the fourth quarter is actually new loans came on higher than that at $3 78 and <unk>.
And so that certainly bodes well for the overall margin.
That compares to 371 that came in in the third quarter and this quarter. It was 63% C&I and that's really one of the big factors that help support that level as well as the fact that we're having significant success in putting in lung force and so that also is helping support the rates.
Right now.
Ken I would just add.
Okay.
I know you track this as well you should.
A key point that Valerie made there is our <unk>.
Mix of C&I.
And comparing us to from others.
Obviously, our mortgage business yields there pull us down.
Somewhat but the C&I book is.
A decent margin business good margin business and I think one of the reasons why were touch higher than some of the other if you look at.
Perfect Alright, thank you.
Thank you.
The next question comes from Steven Alexopoulos of Jpmorgan. Please go ahead.
Hey, good morning, everybody.
Good morning, Steven.
To start first looking at the slide on the roll forward on criticized loans I'm looking at the quarterly on slide 12, that's very helpful. But if I looked at.
The upgrades for the past for $896 million and then the addition of 119 million maybe for Billy can you walk through at this stage, what what's driving the upgrades is it business conditions, improving or are there other factors and same for same for the additions.
Yeah, Hey, Thanks Stephen.
It's very granular and widespread I'd say a lot of it is for.
On the upgrade front you know a lot of it is from our resolution efforts that we're getting into in our stress portfolio. So.
It might be new equity coming in or some restructuring effort that would that would warrant the upgrade.
As far as the additions the book.
Think of the additions or like we had mentioned in the prepared remarks, and the more stress segments hospitality and then a few and the senior assisted living so it would be in the spaces that you would expect so.
That's how I think I would address that with you.
Okay.
Okay. That's helpful and then on the dividend obviously positive news again in the quarter is the new dividend you're announcing is is this the new dividend or could this increase a bit further do you think given where capital levels are and youre not exactly back to where you were prior to the dividend being reduced.
Yes, Steve and I think it's fair to think of that as the most likely run rate for the dividend for the time being.
We re evaluated every quarter so.
Never.
Yes, there was more of a kind of a thought about the year. Then there was a thought about the quarter when we were setting.
From dividend Okay.
That's helpful and then Paul Lastly, so a big picture question. When you think about cadence really from the IPO you guys were a growth bank.
And in the past we have seen many growth banks they needed to work for credit challenge end up tightening the credit box and you have a neutral for credit officer right with the end result, being a higher quality loan portfolio moving forward, but one that didn't grow as it did in the past how should we think about this going forward.
Yeah, I think you really ask the question in a very thoughtful way. So the way I think about it is to take a step back in the <unk>.
Old day smaller base higher percentage grow tired of big team did some impressive percentages.
Elected to slow that growth in the fourth quarter of <unk>.
19, and now Covid.
So I think the ex sort of cadence core growth capability would be in that four to six to maybe.
Maybe 7%.
And when does that presume we said you know hopefully the second half for the year, but but no we won't have the double digit loan growth percentages from from.
Kind of the old days for going forward.
Okay.
Thanks for all the color.
Thank you.
The next question is from Brad Milsap with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Brian.
Okay.
Valerie I just wanted to follow up on the sides of the balance sheet I think I heard in your prepared comments that you really didn't.
I think that you would take the investment portfolio are much higher than maybe it currently as you mentioned 2 billion of cash on the balance sheet at the end of the year you've still got.
Roughly $1 billion of PPP loans coming back assuming that liquidity sticks around is it fair to assume you're just going to sit in fed funds.
We have a small amount of debt out there but.
Is that the way to think about the balance sheet, just trying to get my arms around kind of the size of the balance sheet and the impact of the liquidity that you are thinking about.
Yeah, no you're exactly right, there's going to be.
We continue to be excess liquidity on the balance sheet for some time I mean, we're trying to optimize that as best as we can without positioning ourself.
Negatively.
As we book on out certainly we don't want the securities portfolio, what you get two large certainly at these rates are putting on new securities.
The real per Rep Trek, it's going to be when we see that net loan growth turn and be able to start effectively using.
That excess liquidity, but you're right on that on that margin.
There's a couple you know we've got.
That's callable debt, we've got the maturing debt.
And certainly looking at everything we can do on the margin and that's been one of the key things that we can get them.
Strong starting deposit growth in the near even worth bringing down our lower deposit costs.
Well continue to whittle that deposit costs down at the margin capital flexibility to do that.
Okay, Great and then just as a follow up Paul you guys have always kind of been real conservative in how you treat capital.
Income statement et cetera.
Kind of curious in terms of the reserve I mean do you think.
And you'll be in a position that you would be taking a negative provision at any point.
Or do you think that's where we sit today, that's really not in the cards at this point.
Yeah.
Yes, Brad it's hard to say I mean clearly.
As we saw in the fourth quarter, we had some credits that were resolved 100 cents on the dollar that had some reversion in place. So we've got some reserve release there net net.
We're still looking at some downgrades in the portfolio I mean every quarter, we have upgrades and downgrades. So so that will continue.
I think the answer to that is to be determined, but let's see how the year unfolds I mean, we have been proactive with our reserve percentages.
Time will tell.
Yeah, I don't just bad debt.
2.89% on a reserve level when you look at kind of a day one useful for us.
<unk> level lately, I think about a 155% I'm sure it won't be higher than that are really somewhat.
On a more normalized basis, but that's a lot of room between here and there and so at some point.
And if it's warranted by the credit environment.
That percent allowance should should migrate down.
Great. Thank you guys.
Our next question is from Michael Rose of Raymond James. Please go ahead.
My questions have actually been asked and answered thanks guys.
Yeah.
Thanks for joining us Michael.
Next question will be from John Armstrong of RBC capital markets. Please go ahead.
Good morning.
One John.
A few follow ups, but maybe.
Bigger picture, Paul can you touch a little bit on your footprint.
You alluded to it earlier that you have some of the better markets in I guess.
I want to get into some more details in a second but just bigger picture.
How do you feel about your footprint.
Yeah.
Hello, John.
Really think the regions that we cover or some of the best growth markets in the United States Love, Our Atlanta team, we've got a great team in Dallas.
Houston Core group is always hard working and contributes nicely for Tampa team is outstanding.
Some of the smaller markets, Birmingham, Huntsville, and be really really good markets and I'm proud of our bankers there so.
Ill start mentioning certain areas.
Core business back in the Golden Triangle in Mississippi.
Not as much growth, but really solid markets.
In a place where we're happy to be active and to be doing business. So it's a.
It's a good combination for sure and.
I'd like for growth outlook.
Okay. Good.
And I guess I'm Valerie back to follow up on Brad's question is it.
Safe to assume the near term.
When you think about the loan growth.
Debt any decline in reserves is likely through charge offs.
And we just have a very minimal if any provision requirement is that a fair way to look at it I know Paul you mentioned you.
Due to lower charge offs relative to the prior year, but is that is that the way, we should think about reserves coming down.
Well I think when you look at this quarter, while the percentage increase and the actual dollar amount that came down.
And so that is a factor in the various.
Things that you mentioned, obviously from lower balances and and the net charge offs.
There are so many factors that factor into that reserve.
Whole environment Theres still a lot of uncertainty not just on the credit for it it really just the impact of the virus on the.
The recovery and resurgence and so all of those will we'll have a play but.
Can you just kind of assume all of that is fairly stable and yeah credit migration charge offs and growth in our portfolio shrinkage.
Those are key drivers.
Alright.
And then one more kind of a follow up on Steve's question.
Jim just on the longer term thinking I hope this comes out the right way, Paul but you know that there are a lot of people, where you need to rebuild trust on credit.
And.
Maybe if you are building can you just talk about what's different in <unk>.
Terms of what you've done.
To the credit Department.
How do you go about looking at sectors that you're in and I know that a lot of this maybe isn't fair because it was a pandemic and its just kind of hit you.
We're looking at a couple of businesses, but just help give us a little bit of comfort or help us understand what's different as you go forward I think that would help thanks.
Yeah, John it's totally fire and its definitely a question.
We spent time on our board risk Committee spent time on we've looked at every line of business. We've looked at underwriting guidelines I mean, the biggest thing we looked at it as leverage what's the leverage profile.
And starting in the fourth quarter of <unk>, we felt like that was something that we should adjust and we began pulling.
Pulling our underwriting metrics down.
We did have some disappointments in 19 as Youre, well aware, an investor who are well aware.
So we.
We were showing from both positive trends and then Covid came along and there are a couple of business lines that are hard hit by Covid restaurant, especially family casual dining and hospitality Inc.
Moving to Reeves.
Do those numbers with you. So you wouldn't say, there's just a huge sea change you would say that at the margin, there's just more and more focus more and more caution more and more scrutiny and diligence of each and every credit each and every relationship we can take CRE for example.
Zero change there.
Outstanding portfolio performing beautifully for Covid, so it really would be the CNI portfolio anything leverage without moderators.
And then the family casual dining of course hospitality distress debt, but that industry is dealing with this is certainly well documented so.
I don't know Billy maybe back to your comments.
Yes sure.
And I'll Echo the same but if you really look back.
From when this trend started for us I mean.
An example is leveraged loans have come down 31%.
The third quarter of 19.
We feel like the mix of that kind of the restaurant book the energy concentrations. We had is it a better place than it was then just from a from a mix and a concentration standpoint.
So I mean.
Our daily activity, our weekly activity in loan committee is active.
I do bring a slightly different perspective than we've had historically and and.
It's a balanced approach I've been doing this my whole career and.
That's just like for like Paul said, it's going to be at the margin and at the margin we're going to we're going to be on the conservative end of things.
Okay. Thanks, a lot.
Yes.
As a reminder, if you have a constant please.
For San Juan The next question comes from Matt Olney of Stephens. Please go ahead.
Hey, good morning, and thanks for taking the question.
Want to go back to the hedge and effectiveness that you guys highlighted a few weeks ago and obviously, we saw a big per.
All forward here in the fourth quarter I don't really appreciate maybe all the accounting details behind this but.
If loan balances continue to contract for first half for year.
Could we see an additional pull forward of the remaining hedge beyond what you've laid out today.
So it is based on forecast.
In theory, if our forecast ineffectiveness going forward was.
What was high and it came in lower.
And then you could have an additional.
Level I've been effectiveness, but where we are at.
We've got $33 million remaining day and that'll come in in 'twenty.
<unk> 'twenty 'twenty, one and the remaining $2 million in 2022, so even if it were it wouldn't have a material impact in two.
2021.
Okay got it and then Valerie you May have mentioned this in the prepared remarks any more details you can provide on the callable debt that you expect to retire and then beyond this it sounds like you're also considering maybe some other borrowings of other debt tranches that youre considering prepaying any more details you can you can discuss.
Yeah, Yeah, what we thought is there's $40 million of callable sub debt.
And so that's.
That's that's available to be called and then on quarterly call dates and then another 50 million of senior debt that matures in June of this year and so obviously given the excess liquidity that we don't need to be holding on to any of that debt.
And Matt I would just add the combined savings from those are about $4 7 million a year and.
This might interest you for wave $260 million of debt our annual cost of that debt is about $12 $7 million over come down about four 7%.
Think about that that would be the equivalent of $5 billion in deposits at 25 basis points. So it's yes, it's cheap capital if you need capital, but if you are well capitalized as we are its kind of expensive debt. So.
For now.
Pleased to see it be reduced.
Yeah. Good point, thank you for that.
Then just lastly on the operating expenses I think I get the guidance for 2021, the press release highlighted the $8 $5 million.
Fourth quarter from the incentive compensation.
It sounds like that was a catch up for the fourth quarter is that correct and so should we see the salary line.
Decline in the first quarter.
There Youre right. There was some catch up there and you know early in the year, we really basically had no.
Bonus accruals put into play.
Concerned about what the year could look like and so forth, but obviously that transpire differently as we went through the year and we were able to add back from incentive matters.
Okay got it okay.
Okay. That's all from me. Thank you guys.
Thanks, Matt.
This concludes our question and answer session I would like to turn the conference back over to Palmer for any closing remarks.
Great well. Thank you all for joining us we're really hoping that we will be able to meet with many of you in 2021 and resumed traveling back for a more normal lifestyle.
Lifestyle here also look forward in the future to explaining more sharing more with you about our diversity equity and inclusion initiatives our ESG program.
We're very focused on being a great place to work and partnering with our communities.
If you just kind of take a step back and say, what's the core competence at cadence today confidence took a hit background shut down for sure.
Zero bonus accrual and we sort of hunker down and are preparing for the worst and core confidence of cadence is now fully recovered.
Back on the field looking for business and building the franchise as we have done in the past a bit more cautious and conservative than in prior periods, but still active and hardworking and.
So I can do a good job for clients and build our business further grow revenue grow earnings and create value for our shareholders with that we stand adjourn. Thank you.
Will come from coupons.
Thank you for attending today's presentation you may now disconnect.