Q4 2022 Cadence Bank Earnings Call
Speaker 1: The conference is no longer being recorded.
We continue to improve our operating efficiency, our fourth quarter adjusted efficiency ratio of $58 seven marks our fifth consecutive quarter of improvement in this metric as we move into 2023, while there are some headwinds that Valerie will mention in a moment continuing this improvement is a key strategic focus for our team.
Finally, I'd like to briefly touch on capital, we repurchased $6 1 million shares of our 2022 share repurchase authorization. During the first half of 2022 recently, our board approved an authorization of 10 million shares for 2023, while we currently remain on pause with our repurchase activity we are.
We used to have this authorization in our toolkit and we'll continue to monitor both the economic environment as well as our capital position as we move forward this year.
Valerie I'll get it to you.
Thanks, Dan.
Key highlights that are applicable to both our quarterly and annual results that youll see on slide four.
Eric.
Growth continued margin expansion.
Credit quality and steady progress in the adjusted metrics.
I think on the fourth quarter of 2022 and results include quarterly improvement in our net interest revenue indicate our loan growth and increasing margin and improvement in adjusted expenses due to year end employee benefit adjustments. These were partially offset by seasonal declines in insurance revenue and changed and mortgage servicing rights valuation.
<unk> antibodies provision for credit losses.
Fourth quarter, adjusted PNR with $195 5 million up from $5 7 million from the prior quarter.
Referencing slide five and six we reported net interest income of $359 million for the fourth quarter, an increase of $4 million compared to the third quarter of 2022.
Our net interest margin was 333% for the fourth quarter up five basis points from the linked quarter.
Surprisingly the pace of improvement in the margin slowed this quarter as our deposit cost accelerated in response to continued rate increases and strong deposit competition.
Total cost of deposits increased 76 basis points from 35 basis points in the third quarter. Despite this increase we continue to have a favorable deposit beta thanks to our large mix of community bank deposits.
Our total deposit beta was 28% for the fourth quarter and 17% cycle to date. This compares to the fourth quarter's loan beta excluding accretion at 49% and 39% cycle to date.
Our yield on net loans, excluding accretion with 541% for the fourth quarter of 71 basis points from the prior quarter.
Our balance sheet remains asset sensitive with approximately 48% of our loan portfolio of $14 8 billion repricing in the next 12 months.
Of which $12 6 billion of that re prices within the next three months.
At a higher level as laid out on slide seven.
72% of our loan book is floating or has variable rate terms with 28% fixed rate.
Noninterest revenue highlighted on slide eight 2017, with $114 9 million, which represents a decline of $9 6 million for the quarter.
The decline is driven primarily by a $7 1 million unfavorable swing in the MSR market valuation adjustment as well as a $5 $2 million decline in insurance Commission revenue related to seasonality in the policy renewal cycle.
While the insurance decline is in line with typical fourth quarter seasonal results on a year over year basis total insurance Commission revenue actually increased six 3% from the fourth quarter of 2021.
In addition to these two items, we saw a decline in deposit service charges, primarily as a result of an increase in the earnings credit rate on corporate analysis accounts and an increase in bully income, which is attributable to timing of death benefits.
Moving on to expenses, which are highlighted on slides nine and 10 total adjusted noninterest expense was $279 3 million for the fourth quarter of <unk>.
Klein of $10 9 million compared to the third quarter.
The decline was driven primarily by a decline in compensation expense largely related to employee benefits year end adjustments, including lower accruals on insurance costs and the annual assessment of other employee benefit obligations that have been impacted by higher discount rates.
The decline in other miscellaneous expense included a number of small variances, including lower franchise taxes legal and other items.
You may recall that last quarter, we guided toward a $290 million base level of adjusted noninterest expenses, which was in line with the fourth quarter results factoring out the year end adjustments made to employee benefits.
Regarding non routine adjusted items merger and merger related costs increased to $53 million. This quarter as we completed the franchise rebranding and a core system conversion.
Large component of these costs were in advertising and public information, which reflects the rebranding of our franchise under the cadence bank name and new logo, including nearly 400 offices.
We also incurred a $6 1 million pension settlement expense due to the elevated number of retirements in the fourth quarter and branch closing expense of $2 3 million associated with a 17 branches that were closed or consolidated in the fourth quarter.
Dan spoke to the loan and deposit activity included on slides 11 and 12.
Slide 13 provides credit quality highlights that further demonstrate the points Dan made earlier with steady declines in nonperforming assets throughout the year.
Classified assets increased somewhat during the quarter, but declined 15% as compared to the end of 2021.
As mentioned earlier at the 6 million provision for the quarter supports continued growth in loans and unfunded commitments that we've experienced the.
The ACL coverage finished the year at 145% of loans.
Capital as shown on slide 14 continues to be stable across the board with the quarter's earnings absorbing the growth in risk weighted assets.
As we look forward into 2023 from a loan growth perspective, we anticipate a high single digit growth rate with investment security cash flows continuing to support growth.
We expect that approximately $3 3 billion in securities cash flows and maturities in 2023, including $1 5 billion of low yielding treasuries maturing in the fourth quarter of this year.
Deposits continue to be more difficult to predict with increasing rates and aggressive competition. However, we do anticipate our deposit costs will continue to increase and currently expect to reach our cumulative total deposit beta of 28% to 30% towards the middle of this year.
Net interest margin will be in part dependent on our deposit levels and pricing, but we do anticipate margins to be higher in the fourth quarter of this year than in the 'twenty two fourth quarter.
This.
This expectation is due to the asset mix shift out of lower yielding securities into higher yielding loans combined with the ongoing asset repricing and our variable loan book.
Slide seven in the slide deck provides a nice visual of the repricing timing of our portfolios.
We also anticipate steady growth in our fee businesses, except for mortgage and analysis service charges, which we expect to continue to be negatively impacted by the higher rate environment.
Regarding non interest expenses, we currently anticipate a low single digit growth rate on an annualized basis.
Compared to the $290 million quarterly run rate guidance. We previously provided for the fourth quarter of 2022.
This factors in the anticipated benefits from our merger integration, but also the.
Number of headwinds, including increased FDIC insurance assessments higher pension expense increase CPI levels in many vendor and technology agreements continued wage pressure.
Importantly, we expect merger and merger related expenses to be materially behind us.
Although we are continuing to able to reap efficiencies beyond our initial targets.
Our 2022 net charge offs, which were actually a small net recovery for the year.
Clearly very low so we do expect those to increase to a more normalized level in 2023, However, as Dan noted earlier, while cautious we are just not seeing areas of significant weakness currently.
We have a lot to be pleased with looking back at the results and accomplishments of 2022.
But I think we would all agree the excitement is and the opportunity that lies ahead operator, we would like to open the call to questions.
That's great. Thank you.
We'll now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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Jonathan The question queue. Please press Star then two.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Catherine Mealor with <unk>. Please go ahead.
Thanks, Good morning.
Hey, good morning, Catherine appreciate everybody's patience with our technical problems. This morning.
All good all good.
They already gave a lot of great.
<unk> guidance at the end of your comments. Thank you for all of that and I wanted to start my questions with maybe unexpected so it seems like youre.
Youre, saying take the $2 90.
From this quarter and then grow that at a low single digit pace. So.
Is that net of cost savings or should we grow at that pace and then allow the rest of the cost savings to offset it from there just to make sure I'm clear on that guidance.
That's a fully baked number.
Realizing the savings that we've got baked in as well as <unk>.
The work Thats continuing to be done and the.
The expense headwinds that we and I believe our peers. We're also experiencing as we look into 2023.
Okay, and then that 9 million that was it.
Some of the employee and in insurance changes from this quarter, how do we think about that in the run rate for next year does that is there.
That coming as it was kind of give you like a onetime event from this quarter is that partly in the run rate as we pull that forward to next year.
That's a one timer, but yes, yes, the big chunk of that is really related to the annual assessment of employee benefit obligations and the fact that a higher discount rate because of interest rate changes.
Allowed us to take a credit on that.
That's not something that happens every quarter.
Great. Okay, Okay, and then maybe with all but just on the margin it doesn't feel like you're saying that this is peak margin, but I found it interesting that your guide is fourth quarter to fourth quarter is going to be higher so does that imply that there may be some fluctuations between now and then just depending on how deposit cost flow, but ultimately by the time we.
Get to the end of next year, we will have a higher NIM is that a fair way.
I think you I think you got it well.
As you said it it's the deposits there is a bigger able key there.
But assuming no surprises there.
We actually we could have some modest improvement before things kind of stabilize or soften.
But we are anticipating a better margin as we look to the end of the year really related to all the repricing and the mix out of the securities back into the loan book.
As we've talked about a number of times the variable rate loans continue to reprice as long as we are at a higher rate environment.
You said that I think Katherine is correct.
I think we see an upward trajectory on our margin, but maybe not linear we could bounce around here, but we're moving in an upward direction.
Great. Thank you so much.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions just wanted to start on your commentary around the fee businesses, obviously understand mortgage and service charges under pressures given that.
The ECR, but.
Can you just kind of lay out your expectations for some of the other businesses like auto insurance, obviously, you're benefiting from a realm.
A relatively high hard pricing market.
I guess, maybe on a little.
Sure.
On the trust and the trust and wealth side, maybe that's a little bit harder to see but it sounds like youre kind of guiding.
Or at least the outlook is to see how the year over year progression.
Can you just kind of walk through some some phosphate abided by business line.
Maybe how we should.
Think about them.
Yes, I think you've covered some of that Michael good to hear from you.
Mortgage is clearly flying at the headwinds I would expect that <unk> is not going to be a good quarter for mortgage hopefully two Q3 Q during normal home selling season will come back a little bit on that piece where portfolio more of those loans to the secondary market for arms there is not.
There is not working today as that market comes back on and we can fix that that means we're not collecting that gain on sale.
For the loans that we're booking onto the balance sheet the arms.
So mortgage is clearly under pressure I think you were spot on on <unk> insurance looks to be in good shape. Today I think we continue to win business. Our insurance team is growing customer base, our insurance team is growing.
The income and hard insurance market will help us so we expect to see good progress on the insurance side in 2023.
Wealth management team is all similar to anybody else in wealth management dependent upon asset values. So depending upon what asset values. Due this year will drive that revenue, we're hoping that the market will move up into that we will see a benefit there.
I think the ECR on Treasury management, we do believe that we'll see some pressure because of the rising ECR on Treasury management other than that though I think our bank fees, we've already given back.
The pieces of the puzzle we needed to give back and so we continue to see stability. There are cards hard servicing fees, we continue to see increasing volume on cards, we continue to see increasing.
Average ticket or average transaction on cards. So the card income continues to be moving out.
Sorry did I Miss anything.
Thank you <unk>.
Yes, it sounds like the big ones. Thanks for the color.
Maybe just switching to the capital and the repurchase.
It sounded like if I could.
As described in the prepared comments.
Maybe buybacks wouldn't be a near term thing maybe like capital.
Build a little bit here is kind of the.
The operational efficiencies from the merger continue to play out is that the way to think about it that maybe nearer term purchases not on the forefront, but maybe think about it more usage in the back half.
Yes, I think Thats, a fair way, Michael So look I think we want to be prepared if the market backs up on us we certainly have that in our tool kit and we can take advantage of a market if it backs up but we're currently watching where we are we're watching the economy there are still unknowns.
Front of us and we want to make sure that we're fully prepared.
Okay and then maybe just finally for me just on the margin back to the margin call. Our tenure valor Youre talking about the core margin I believe last quarter, you kind of talked about accretion income for the year somewhere in the $22 million to $23 million range was obviously higher this quarter just wanted to clarify that and then get any.
Any sort of updated expectations for what you expect for a scheduled accretion for this year. Thanks.
Yes, no no thats exactly right.
The court.
Margin is really the direction that we're headed there on the accretion.
Youre spot on on the scheduled accretion numbers for next year close to $23 million.
And that is a headwind for this year, we had $40 7 million for the year of 2022, and it was a little bit higher this fourth quarter because of some paydowns and so forth.
But no change to the expected.
<unk> accretion for 2023.
Alright, thanks for taking my questions.
Another question.
Comes from Manan <unk> with Morgan Stanley . Please go ahead.
Hey, good morning.
Good morning, I wanted to follow up on the comment on deposit beta as I think you noted 20% to 30% cumulative deposit betas.
By the middle of the CR.
Do you expect that to be the peak.
Or just given your other comments on the elevated level of competition that you and others in the industry are seeing right now should that.
Deposit beta ramp up as we go towards the end of the year.
Yes, actually what we are modeling is.
An increase from where we are today, which is the 17% cumulative two at kind of our peak deposit beta mid year of next year, which would be in that 28% to 30% level.
On a total deposit basis.
Got it and then as you think about the.
The mix of funding.
To the extent that loan growth exceeds the securities run off between the quarters in the year could we assume that you would plug that with FHA L. B.
Sure.
The other finding Levi's that you might wanted to pulse such as <unk>.
Growing the CD book.
No I think.
We've got lots of security is running off in 2023. So most of the loan growth in 2023 can be funded if not all with a securities portfolio and the move up of the loan to deposit ratio. So moving our loan to deposit ratio North of 75 is a goal of ours, we would like to see our loan to deposit ratio higher.
More normal environment.
From a funding standpoint, that's just a temporary spots. So we're currently playing in all of those spaces that you just mentioned I think we've got our team moving to grow deposits. Some of our customers are moving Cds around some people because of rates have taken Cds. So I think the answer is all of the above is where we would be funding growth.
Got it in other states it's mark.
<unk>, Tom David or are you, putting on a little bit of duration there.
Yes, Steve this is such a small piece of our book, it's mostly short we're not offering any specials for any long term money.
Got it very helpful. Thank you.
Thank you.
The next question comes from Brandon King with Truest. Please go ahead.
Hey, good morning.
Good morning, Brandon.
Okay.
I'm curious.
With putting all the pieces of guidance together are you still sticking with 54% efficiency ratio target for next year.
Yes, that's a great question I think we've done a lot of headwinds on that Valerie yes.
Yes, so what were anticipating is gradual progress just like what we saw in 2022 gradual progress on that efficiency ratio improvement.
And expect to continue that.
There are a few headwinds as Dan mentioned some of the FDIC expenses some of the other things that we talked about that.
It may be early 2024, before we get to that number but I think.
We'll be we'll be we'll be making gradual improvements and certainly working towards that number pretty aggressively.
Okay.
Yes.
Okay, and then on loan growth high single digits.
Seem to be a bit of both periods I'm, just curious where do you see companies in that number and kind of what you're seeing as far as demand.
You mean the platform versus corporate.
So I'm not sure I am hearing the whole question Youre talking about loan growth being above peers and what was the second part of that.
Yes, yes, so loan growth kind of what gives you confidence in that high single digit growth figure.
Each year and then if you could provide some commentary around community versus corporate lending, Canada demand outlook there.
Okay, so opportunities within the corporate lending and confidence around the high single digit loan growth I think is what youre asking about I think our footprint is going to give loan growth. So the footprint that were sitting in <unk>.
Continuing to perform well as I said, we're not seeing really any weakness will speak up today Christian hanke are both in the room here and can talk about all you want to talk about on loan growth, which one of you guys want to go Chris I'll, Let you go first and I'll fill it yes, Dan started at the 400 branch footprint.
<unk>.
Commercial teams with deep relationships with diverse products and services.
In a resilient growth markets as well as what I would call a more stable and lower risk markets as well. So theres just a lot of levers that.
That we can pull and when we look at our pipelines, we are seeing still active and we still see.
Looking at least for the next few months, we see like we've got good pipeline of activities that we're comfortable in some of those loan growth targets.
So I agree 100% of Chris I would categorize it as it's not too hot but not too cold and.
We're positive in 2023, we do have capacity in our corporate teams, which is a nice thing to have when youre headed into some names that are having to have some good loan growth, which we're going to do a lot of it depends on the macro environment and what that gives us to the second half of the year right.
Right now I would tell you that I feel good and positive about the guidance were given.
Already mentioned earlier.
Thanks for taking my questions.
Thank you present a rhythm.
The next question comes from Brett Robinson with hub group. Please go ahead.
Hey, good morning.
Thanks for taking the questions wanted to talk about credit for a second and obviously spectacular.
Number is thinking about the reserve, it's basically been flat.
Last three quarters from a dollar perspective, and just wanted to hear some thoughts on provisioning going forward and just thinking about the black box of seasonal as well as the classified assets are really low, but they did pick up a little bit in the fourth quarter any anything that was prevalent in that increase in anything that you guys are watching from a credit risk.
Victor.
Thanks.
Yes.
As I said I don't think were seeing anything today.
Scott any alarm bells ringing on it so but I think the move around and classified assets is just normal move in and move out bounce and I'll, let the guys to recover further when we look at seasonal I think our model continues to work for us.
You saw this quarter was provisioning for growth.
So we're not seeing weaknesses in the portfolio. So we're provisioning for growth you guys wanted to touch on.
Yes.
Back to the classified loans normal cycle normal loan grading our average life legacy access.
From our view, we've got an average larger average loan size now so you're going to see some larger loans moving out nothing in there that was systematic or a trend that we would note normal loan grading normal working with customers.
And I think from there you get the model.
What's the model going to project for us.
Economic forecasts and what our own loan grading systems do any other color.
Well.
Okay.
Dan anything.
Maybe not for your for your bank, but just anything that you would point out is something that you kind of view is.
Potentially problematic for the industry, whether it's office or some others. Some other segment of lending that you would say hey, this is something that we're keeping a close eye on.
We're just not seeing it so when we look at what's happening today, we're like everybody else. We're watching carefully we're paying attention. We think we're making good credit decisions.
That team is asking lots of questions, but across the footprint that we're serving the economies continue to move along we're still seeing some stresses on labor in some places. Some places are still not able to find labor people are moving up there they are labor costs.
We're still moving.
If the economy shows resilient thanks for all the color Dan.
Thanks I appreciate your time.
The next question is from Matt Olney with Stephens. Please go ahead.
Pardon me Matt This is.
A follow up from Catherine Mealor with <unk>.
I didn't mean to jump in front of that.
Hi.
My follow up is just back to the efficiency ratio question that Brandon asked.
Darren can you just clarify what number of efficiency ratio you were referring to is that I think when you originally put out slides.
When the deal came together I think it was a 54% efficiency ratio is that a number that you think is.
<unk> 24, or do you think it's higher than that just given some of the expense headwinds you talked about.
Yes, I think that's the number we're talking about we are still targeting getting there.
Right, Okay, but just maybe not until summer.
Sometime in 'twenty four.
Yes. Thanks.
Things that have happened in the last little bit is delayed the trouble that trip to get there a little bit, but we're going to get there.
Lately.
Great. Okay. Thanks, just want to clarify that thanks.
Okay. The next question is actually for Matt Olney with Stephens. Please go ahead.
Hey, guys. How are you good morning.
Good morning, Matt Catherine <unk> for the.
No worries at all.
Most of my questions have been answered I just wanted to circle back on the insurance segment I know insurance has been an important part.
The strategy going back several years, even the Bancorp south days.
Yes, there is some speculation in the marketplace about some of your larger peers that may not be married to their insurance segment longer term I'm curious about the strategy of cadence in the insurance segment I'm curious Howard Court and this insurance segment as to the longer term strategy of the bank.
Yes, I think we're no different than anybody else, we're watching what's happening in the market, but we like insurance. We've always liked the insurance we've continued to grow insurance in the last quarter, we added another insurance agency.
We were able to add into our team. So it's clear clearly a big part of what we're doing every day, but the market is always doing something different and so you pay attention to what's happening in the market.
Got it okay.
All my other questions have been addressed thanks guys.
Hey, Thanks, Matt appreciate it.
As a reminder to ask a question you May Press Star then one.
The next question comes from John Armstrong with RBC capital markets. Please go ahead.
Hey, good morning, everyone.
Hey, John .
Just a couple of follow ups.
Obvious, but the high single digit growth rate Youre, assuming period end, we use period and as a base.
Those are periodic guidance, yes, FERC burbs loans, yes, yes, okay. Good.
You talked about just some.
Using some securities.
Cash flow from Securities to fund loan growth, how do you feel about earning asset growth and balance sheet growth for the year help us understand the mix change.
Yep.
Again, it all goes back to deposits.
And what we saw the industry fee this year.
Youre not going to grow mentioned, earning assets.
We're able to grow deposits.
The fourth and that would allow for some earning asset growth otherwise it.
That's just simply the variable yes, nobody wants to go backwards and I think when we look at 2022, we're going to see the industry as a whole loss deposits we lost some food.
Hopefully that trend is turning and so that's really the question here. If we can grow deposits, then youll see earning asset growth.
Yes, Okay, yes, the earnings notes look kind of the opposite of what we wrote 18 months ago right.
On balance sheet movements.
Yes.
What would you say is like an average new interest bearing.
Rate that youre paying right now and are you seeing that pressure ease at all kind of the second derivative of deposit pricing pressure.
Okay.
<unk> is an easy answer no there's no there's no he's on the competition on deposits at all.
Yes. The competition is fierce out there, but most people are competing up the yield curve you see in the short term.
Competition is in the short term Cds space.
Market space.
What are you seeing them move out of it.
Noninterest bearing accounts.
If you are an average number but the <unk>.
We're building on the specials, we're running in the fours.
And spectrum on money markets, some exception pricing there.
High threes.
Okay.
Okay.
Builders have.
On average for the quarter, the new interest bearing came on at about 257.
Okay.
And then any difference between on the pressures between the community bank footprint in about 76% you flag in the other parts of.
The business.
Or is that too much onto everywhere.
This intense everywhere not from my perspective somewhat in some ways the Canadian bank.
The local competition may be more fierce in the metropolitan competition. It just depends.
Okay.
I'll wrap it up I could go on forever on slide seven but I like it is good.
But I guess, Dan an easy one for you, maybe a softball, but rebranding feedback is there anything that hasnt gone Walter you'd be generally have been satisfied with it.
5000, some odd signs changed in a short period of time.
Lots of activity went onto that we've been really pleased with the way that was executed I think that.
We could have we could have had a whole lot of issues, but we spent some time getting ready for the full 18 months were slower in getting everything done, but the benefit of waiting for the benefit of putting it all together at one time and the benefit of getting it all behind us in the fourth quarter, we're really excited about where we are.
Okay.
Alright, thanks, Thanks for the time.
Thank you John I appreciate it very much.
This concludes our question and answer session I would like to turn the conference back over to Dan Rollins for any closing remarks.
Thanks again, everyone for your questions and your participation today as I mentioned a minute ago 2022 marked a year of tremendous change progress and success for our company in closing I just want to take one more opportunity to brag on our team.
It took an incredible amount of effort and focus for everyone in our company to achieve what we accomplished in 2022 and as we continue into 2023, we are committed to continuing to grow our business improve our operating performance and enhance the value created for our teammates and shareholders and communities that we serve thanks again everybody for your time today, we look forward to speaking to.
You again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Okay.
Sure.
Okay.