Q2 2021 Cadence Bancorp Earnings Call
Any more on the agenda and markets, where we have overlap we often find our bankers know each other and we have positive comments about mutual respect for.
More often and not theres not a lot of overlap so of Dan and Kriss are learning quickly about opportunities and Atlanta, Tampa, and Orlando and I've been extremely impressed with the great team of bankers, the small strong community banking ties and markets like Tupelo of Little Rock Nashville, Gulfport of Baton Rouge Places, where we have no.
Presence.
Many bancorp bankers have long tenure with the company people come to Bancorp, South and they stay it's a good sign it's a sign of a good company.
Just really impressed with the teams and such pleasant experience.
With every visit I become increasingly more encouraged and confident about what our combined company can do the integration plans and collaboration plans are going very well so what looked like a strong merger at announcement looks even stronger today.
To that point I would like to remind our investors that the shareholder meeting is scheduled for August night at non a M central time and will.
I'll be a virtual meeting so.
So now, let's turn to the second quarter operating results continue to have a strong year, our adjusted <unk> for the quarter was $85 million or $1, 83% of adjusted assets. This is stable compared to last quarter and continues to represent top tier operating profitability compared to peer. So just a reminder, our model.
Our mix of business with heavy C&I.
Influence it generates really attractive returns over time.
The second point is credit credit continued to improve across the entire portfolio evidenced by a $52 million reserve release taken in the quarter criticized loans declined $148 million or 18% linked quarter net charge offs of continued to improve down 10 basis points to 29 basis points for the quarter.
As I look to the of second half of the year I expect credit trends to continue and a favorable direction for the rest of the year.
The loan portfolio ended the quarter at 11.6 billion. If you exclude the pay down of PPP loans.
We were down modestly linked quarter restaurant loans made up the majority of the decline and Thats by design. So our general C&I portfolio grew $42 million over the last quarter and we are seeing some nice growth and new commitments through both the C&I business and our commercial real estate.
So we're definitely seeing business activity is improving and the economy is accelerating and <unk>.
I'm going to go out of limb and say it feels like we might have reached the inflection point but of course.
No guarantee on this.
Ample capital has long been a key strategic advantage of cadence and our position was further strengthened and the second quarter at quarter and each of our for key capital ratios increased significantly and we.
We all stand now and the low to mid teens far in excess of levels day, well capitalized by regulators, our tangible book value per share ended the quarter at $16.72.
So as has been the case in previous quarters shareholders will receive a dividend of <unk> 15 per share. This will be payable to shareholders of record date of August 6 and payable on August the 13th.
With that I'll turn the call over to Valerie.
Thank you Paul and good morning.
Second quarter, our adjusted net income was $106.1 million of 84 per share up from the prior quarter adjusted net income of $104.7 million and 83 per share.
Similar to the first quarter, we recorded a provision release and this quarter at $51.9 million, reflecting the continued improvement in credit and economic forecast.
Even with this provision release, our allowance for credit losses remains robust at $2.1 3%.
Turning to the balance sheet loans of 11, 6 billion declined $730 million during the quarter driven by PPP loan payoff.
Excluding the PPP loans loans declined $142 million income.
The decline of $55 million and the rest of the restaurant portfolio.
It is notable however, the general C&I loan, which represent about a third of our total loans reflected net growth of $42 million. This quarter in spite of continued excess liquidity and the market.
Deposits of $16 billion were down $145 million at mix improved as noninterest bearing deposits as a percentage of total deposits increased to over 35% at June 30.
We continue to add to our $4.3 billion securities portfolio, which is up $360 million this quarter.
Additionally, our balance sheet liquidity remains elevated with loans to deposits at 73%.
Net interest income decreased by $4.2 million and the quarter to $138.5 million, reflecting lower hedge revenue and accretion and the shift between higher yielding average loans to lower yielding average investment securities.
Surely offset by lower funding costs, while we have added to the Securities book, We do continue to maintain significant balance sheet liquidity with cash and short term investment balances, averaging 2 billion during the quarter.
Our net interest margin for the quarter declined by 12 basis points to $3 ones. There of percents again, driven by the decline of the hedge revenue and earning asset mix shift.
On a positive note deposit costs reached a record low at 15 basis points this quarter down 5 basis points, which match the decline and loan yield excluding hedge and accretion income and PPP impact, which also declined by 5 basis points to 386%.
You may recall, we paid down $40 million of callable sub debt in March with the rate of 4.9%.
This quarter, we also paid off $50 million of maturing senior debt with the rate of 5.4%.
Adjusted non interest income showed nice growth and the second quarter at $46.5 million up $2.8 million of 6.4% from the prior quarter.
Increases included account analysis of service charges SBA income credit related fees and alternative investments earnings partially offset by softness in mortgage and seasonal decline for trust revenue.
Adjusted noninterest expenses of $99.8 million continue to be well managed up $2 million of 2% compared to the prior quarter due to annual incentive accrual and merit increases.
The adjusted efficiency ratio was stable at 53, 9% driven.
Driven by the quarter's net income and a reduction in risk weighted assets capital continues to grow and the ratios remained very strong.
In summary, we continue to be very pleased with our 2021 performance as reflected in our PPE and are remaining well above peer levels at 183% of total assets.
Business generation is active across our business lines and geographies and additionally, credit metrics continue to improve funding costs continue to ratchet, Dan and we saw net growth and general C&I loans.
Looking forward, given our strong capital and liquidity levels attractive markets and profitable business model, we are poised to capitalize on growth opportunities as we combine with bancorp south.
Let's open the call for questions.
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 were using a speakerphone please pick up your handset before pressing the keys if at anytime your question and that's been addressed and you would like to withdraw. Your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Our first question will come from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions.
Maybe for Valerie Paul it's really good to see the momentum and a lot of the fee income businesses. This quarter and I guess my question is is this a.
Our run rate is sustainable obviously SBA gains were a little bit higher.
Had some rebound and strength from the account analysis fees on the service parts and service charge side and advisory income.
And trust of all did pretty well, so I guess I'm just trying to get a sense do you think the momentum and a lot of these fee income businesses will continue or is there some maybe some acceleration and some of the businesses that we saw the score.
Yeah, I'll comment antibody Valerie his comments as well.
Matt I mean, it feels like a pretty good portfolio and I look at our wealth business and mortgage.
Mall business.
And on any given quarter kind of bounce around a little bit of of course, it can but I think the the core portfolio is really key.
Incrementally and.
And as the.
<unk> items, which as I mentioned in the prepared remarks, we feel like we're at an inflection point.
And thank the fee income businesses will follow which kind of all of you of functional.
The number of accounts and the number of new businesses and <unk>.
The activity overall.
Derivative of all of those things and have done the touch.
Touch optimistic there so.
And I don't know of battery your perspective.
Yeah, and actually we feel very good about the the fee revenue and where we ended up this quarter and net the ongoing outlook for that.
A couple of.
Additional comments on that for the service charges most of that increase was and account analysis charges given the rate environment, our earnings credit rate is down and.
And significantly from where it has been over the past couple of years. It takes you a while to kind of get down to that level, but we're there now and youre starting to see that flow through and the income.
The mortgage banking revenue was softer this quarter, but that's probably a more normalized level and you know were just most of what we sell is refinances and.
Dwindling down significantly and so, but even with that softness the strength and the other lines of business on the fee income really supported very nicely on the SBA income and.
And there was a little bit.
About 300000 of of SBA servicing rights and that can be and little bit.
The volatile there, but the rest of it was really related to their debt.
Sales of those loans and the business and the reason that that's up significantly and really that we.
And we made a choice to.
Outsourced effectively this last round of PPP loans to a partner and.
Freeing up that SBA team to do what they do best and generate those loans and that's part of what Youre seeing is that the value associated with that decision come through and the bottom line.
Very helpful. And then just switching of the margin.
If I exclude all the the accretion and the the PPP fees.
Obviously, we're down do you think we're getting to a point, though with some of the balance sheet actions and the deposit.
The mix shift, where we're we're getting closer to a bottom here on a kind of a standalone basis before the the deal closes or would you expect some from some additional compression over the next couple of quarters. Thanks.
Yeah, that's that's the.
And $1 billion question, obviously, we do our deposit costs have come down really nicely. The pace on that is going to slow we do have a little bit more room there.
About a 1 billion and repricing Cds over the next 6 months or so as well as the impact of the debt Paydowns that we've made.
And as we put on new loan they are coming in at the lower yields that however is significantly higher than security genomes for cash and so we.
We are hopeful that we have reached that bottom, but it is going to depend a little bit on that earning asset mix as we look forward.
But to the pulse point on the inflection side and we do have very nice pipelines on the lending side and I may let them speak a little bit to that.
Okay.
Okay.
And then just following up on that it was good to see the general middle market.
The increase was that more of a function of I assume that wasn't a ton of existing line draws but maybe just the growth in the and the portfolio and maybe if you can just touch on.
And the pipelines and kind of where they stand and what transpired quarter to quarter and any comments on what utilization and it looks like at this point. Thanks.
And I'll probably jump in here if that's okay. This is Hank we are seeing some nice volumes and loan committee.
And our CRE team has been very active over the last year.
It's kind of nice AG the all of my 1 on ones prior to this call and.
And I'm getting a lot of good feedback from the treasury side and deposit generation and fee income is kind of alluding back to what you were talking about earlier, but seeing nice volumes on the loan side across the board of little bit of pressure from competition. As there are a lot of folks out there and looking for loans, but I would echo the comment on on the NIM and are optimistic about the loan.
And the turn that we feel is underway.
And.
Okay. Thanks for taking my question.
Our next question will come from Jon <unk> with RBC capital markets. Please go ahead.
Okay. Thanks.
And.
Michael took 1 of my questions on London.
Can you talk a little bit of Bob.
Closets as well pre pandemic and pre merger we used to talk about.
Some of your deposits market share gains, it's kind of hard to tell with all the.
The liquidity and the market, but if you kind of set aside the stimulus and government impact what's happening.
Underneath in terms of some of your business wins and market share in terms of deposits.
Yes, John and I'll come in and again and.
By the others.
And we have continued to.
Astro, calling officers to focus on deposit growth I mean, we won't core deposits, we want more checking accounts, we have seen nice improvement and our mix.
Over the last couple of years from more DDA.
But your observation is right I mean, it is sort of muddled.
Given all of the liquidity and the system and.
A bit harder to rate.
We have pushed.
Great.
Pretty hard I mean, it just with the amount of liquidity and the system.
<unk>.
We just can't afford to pay as much for deposits and so that that all flow through I guess would be the 1 way of saying it but the core deposits are still valuable and and the long haul we want to grow that book in terms of.
The treasury teams out part of all day every day and.
And looking for new business, and and we'll keep going that direction.
And others comments.
Okay.
I would just say that's well said I think when we see the volume pick up on both sides of our Treasury team is very active with our commercial loan officers and.
And as I mentioned, we've got great leadership, there with Katrina and and the pipelines are very strong.
Okay.
And.
And I I'm not sure who will take this 1 but just in terms of some of your.
The coordination and traveling with Dan and Kriss.
Are you guys thinking about.
And some of your lending activities and.
I'm curious if your ultra and Youre lending approach at all.
Do you anticipate the combination.
I'm sorry, yes.
Okay go ahead, Paul I couldn't pick up that question my apologies must be my phone.
The question was how do we how do we plan to alter our lending your Fannie and <unk> and <unk>.
Go into market as a team and John and I would say it this way I mean, it's pretty much theres just not of lot of overlap. So the people are going to be doing basically what they've been doing all along.
We're going to continue to focus on the segments, where we.
We've been active and.
Just I.
And I guess, the best way to summarize it as is everybody is going to keep doing pretty much what they've been doing.
Okay.
The other question here, maybe and maybe it's for Billy but do you guys expect any more material step downs.
Non performers before deal close.
Are there some things there that are closer to resolution.
Thanks.
Thanks, John.
Timing of this is great every month, we do kind of our criticized and classified kind of monthly update meeting and we had that last Friday and I would say, it's the opposite of.
Trends are continuing to improve.
While we don't have perfect visibility and the timing of some of the resolutions and upgrades, we do have visibility and probably another 25 at the 35% reduction and criticize over the next 2 to 3 quarters. So.
Say, its more timing and a positive manner than.
So just a question of do we have any surprises there is always going to be something that pops up and I think on the macro basis, we're feeling more positive and negative.
Okay.
Alright, Thanks, a lot I appreciate it.
Thanks, Sean.
Yes, John.
Again, if you have a question. Please press star then 1 to be joined into the queue. Our next question will come from Matt Olney with Stephens. Please go ahead.
Good morning, this is actually Jordan and associate and for Matt I've got a couple of questions for you all.
What percent of your loans are variable rate.
And then within those.
Variable loans what per center currently at their floor.
Yes, sure I'll take that and we've got about 65% of our loans are variable rate and that largely being driven by our C&I business.
And we have.
Let's see.
At about $2.2 billion, so close to 30% of those loans are actually on their floors right now.
Perfect. Thanks, and then just a follow up to that what's the spread between the floor rates and the contractual rate just trying to kind of appreciate how many rate hikes.
And I need to see for these loans to get out of their floors.
Yes, the average floor for those that are on their floor is $3.75.
And this might give you a little better perspective. However, you know we've got a shock plus the 100 and.
And of our interest income and net interest income plus 4.6%. If you take that 2 of plus 50 basis point shock at the plug.
1, 9%, so just a little less than half of that so and.
And that gives you a little bit of perspective at the second 50 basis points, you'll get more than the first 50 bet, but it's not dramatically different.
Yes.
Perfect. Thank you.
And that's it for me and I appreciate it.
Thanks, Ken.
And if you have a question. Please press Star then 1.
Yes.
Is there and no more questions. This concludes our question and answer session I would like to turn the conference back over to Paul Murphy for any closing remarks.
So great Thanks and Tom.
Summary, I would just say I'm really pretty pleased with the first half of the year based primarily on our continued execution as evidenced by the strength and P. PNR.
<unk> and attractive footprint with the mikes growth markets, where C&I businesses, well positioned really well of a nice balance of businesses, our wealth and mortgage business.
I like the mix of our of our R. R.
Our business mix.
We expect credit trends to continue to improve and <unk>.
Lastly, as was mentioned our planned combination with our partnership Bancorp South represented a really unique opportunity to create and organization with scale and expertise that.
I believe will drive value for shareholders and customers and the communities that we serve for many years to come so.
With that the call is the journey.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.