Q1 2023 Cadence Bank Earnings Call
With 400 million, which we view as reasonable given the industry pressure on deposits.
We actually saw a modest increase in our deposits within our community bank offset by some normal first quarter outflows from some of our corporate customers, which is not unusual given the annual bonus and tax payments during the quarter.
The sticky granular nature of our largely rural deposit base has been and will continue to be a tremendous value to our franchise.
We have an average consumer account size of less than $20000, while our average commercial account balance is approximately $135000.
Additionally.
As of the end of the first quarter approximately 98% of our total accounts had balances less than $250000 and 70% of our deposit dollars are either fully FDIC insured or collateralized.
From a loan growth standpoint.
We had another solid quarter reporting net loan growth of $933 million or 12, 5% annualized.
The largest portion of our growth this quarter came from our corporate banking team that continues to be very diverse both geographically and by category.
A portion of this growth is funding on existing CRE credits originated in prior quarters as we look forward our pipelines have declined but we're still seeing good activity.
Having said that the overall credit tightening is very apparent in the industry as almost all banks are requiring deposits.
I anticipate pipelines will continue to decline over the next quarter or two however, we continue to have a large unfunded CRE book of existing lines that will fund throughout this year and will be somewhat of an annuity for us on loan growth in the coming quarters.
Stepping back and looking at some of our other financial metrics. We reported net income available to common shareholders of $74 3 billion or 40 <unk> per diluted common share.
And adjusted net income available to common shareholders of $124 4 million or <unk> 68 per share on an adjusted basis. The primary difference between the two was a loss on sale of investment Securities, which I will discuss further in just a moment.
From a credit quality perspective, net charge offs continued to remain very low totaling just one $9 million or two basis points annualized we recorded a provision for the quarter of $10 million, which accounted for our net loan growth as well as some increases in nonperforming and classified assets.
We've said for quite some time that we expected to see our credit metrics returned to a more normal level from the historically low levels. We've reported now for many quarters.
Like the rest of our industry expect to see negative impact of increasing rates on our clients' year end financial reporting which has driven some grade migration.
This has been especially true in the C&I space for us.
Before I turn it over to Valerie to review the financial statements I would like to briefly discuss the ongoing efforts to improve profitability and operating efficiency.
During February we sold $1 5 billion in available for sale Securities that had a weighted average yield of 70 basis points, which resulted in an after tax loss of approximately $39 5 billion.
<unk>.
This trade.
As expected to have an earn back of around seven five months and be accretive to earnings in early fourth quarter.
Ultimately improving net interest income by approximately $10 5 million this year.
The strategy was strictly an effort to improve our financial performance and was unrelated to and well in advance of the industry liquidity concerns that occurred later in the quarter.
In addition branch optimization is one of the many efficiency initiatives we are focused on.
We plan to close an additional 35 branch locations during the third quarter of this year as part of our ongoing effort to optimize our branch network structure and to improve our efficiency.
These closures are in addition to the 17 branches closed in the fourth quarter of last year. This branch optimization. In addition to our other efficiency initiatives underway is expected to result in expense savings of approximately $15 million to $20 million annually.
As we are now past our system conversions, we are continuing to actively identify and execute on additional efficiencies as we look forward through the coming quarters.
I would be remiss, if I didn't acknowledge Palmer if these transition this month from executive Vice Chairman two a key consultant for both me and the management team as you know Paul was the force behind building legacy cadence and coined the phrase for same day service call by eight P M, which exemplifies the company's service oriented culture.
While he is no longer engaged in day to day management. His continued commitment to customer engagement and service insight will be invaluable to all of US as we continued to grow as the new cadence bank.
Now, let me turn it to you for a few minutes on financials.
Thank you Dan.
I wanted to first point out.
A bit of new information that we added this quarter to further illustrate some of the points Dan made on our deposit base and liquidity position specifically included in our slide deck on pages, four five and six <unk>.
Thanks.
Dan mentioned, 70% of our deposit base being either fully insured or collateralized. The top left graph on slide four shows the components of this calculation.
One of the points of confusion, let me sign some of the early screens.
They were published on this topic the lack of adjustment for collateralized public bonds, which in our case is a fairly meaningful number at approximately 6 billion as at the end of the first quarter.
When you take this into account, we compare very favorably with peers with over 70% of our deposits in either insured or collateralized.
Further our contingent funding availability, which is shown in the slides as well.
Is that over 50% greater than our uninsured and collateralized deposits total.
Slide five speaks to the diversity and granularity of our core deposit base.
Over 75% of our deposit balances are within our community bank structure and over 85% I brought deposit accounts are consumer accounts.
Additionally, the nature of our deposits are tenured.
Over 70%, having been with the bank over five years, including over 50% that have been witnessed for over 10 years.
We're very proud of our granular deposit base and our longstanding relationships that exist between all of our customers and bankers.
Regarding our $10 9 billion securities portfolio.
We used to be.
As it has been historically fully categorized as available for sale, but any fair value adjustments transparently reflect that on the balance sheet.
We have always believed balance sheet flexibility is important and that flexibility allowed us to execute on the accretive security sale in the first quarter without any negative implications to the rest of the portfolio.
Our security attack, representing just over 20% of our assets is made up of highly liquid largely government backed securities with an effective duration of just over four years.
Given the nature of the investments it provides solid cash flows on an ongoing basis and we anticipate approximately one 5 billion in cash flows to come off the portfolio for the rest of 2023. This can be used to support higher yielding loan growth or other investments.
Moving on to the components of our net income for the quarter and looking at slides 12, and 13, we recorded net interest income of 354 million for the first quarter.
Klein of $5 million compared to the fourth quarter at 2022.
First quarter has two fewer days than the fourth quarter and each day is worth about $4 million and net interest income.
Excluding the day count we would have increased around 3 million linked quarter due to the strong loan growth and positive impact of higher rates on our earning assets.
Our net interest margin was 329% for the first quarter down just four basis points from the linked quarter.
On a net basis the decline in the margin was simply due to the excess liquidity that we added to the balance sheet in March with the impact of what I would call routine higher funding costs offset by the improvement in earning asset yields.
Our total cost of deposits increased to $1 two 8% from 76 basis points in the quarter as.
As expected, we continue to see migration from noninterest bearing products to interest bearing which is reflected in our linked quarter decline in our percentage of noninterest bearing deposits from 32, 7% at year end to 29, 2% at the end of the first quarter.
Although this quarter's ratio was somewhat impacted by the late quarter addition of $1 6 billion of brokerage Cds.
Our total deposit beta was 59% for the first quarter and now stands at 25% cycle to date on accumulative basis.
This compares to the first quarter's mountain data, excluding accretion of 53% and 41% cycle to date.
Our yield on net loans, excluding accretion with 587% up 47 basis points from the prior quarter.
That's a lot of information, but when you step back we are very pleased with our ability to continue to grow net interest income on a per day basis.
Continuing to grow loans and improve our earning asset yields to offset funding pressure.
Looking out over the rest of this year. We currently anticipate our margin to try them pretty stable to potentially upward if our deposit assumptions hold including a cumulative deposit beta of 30%.
Noninterest revenue highlighted on slide 15 by $74 1 million, which includes the security laws that Dan mentioned earlier.
Excluding this item noninterest revenue was $125 3 million for the quarter, which.
Which is the $9 9 million increase comparable to the fourth quarter.
Insurance Commission revenue is responsible for approximately 5 million of the increase as fourth quarter is the lowest quarter each year from a seasonality standpoint.
Insurance continues to perform very well for aspirin dose that retention and pricing perspective, which is reflected in our year over year quarter growth rate of 11%.
Mortgage revenue was also up $3 million and it increased due to increased origination revenue and a decrease in payoffs and pay downs.
Alright, and merchant fee revenue declined this quarter due both to the seasonality of transaction volumes as well as the impact of our fourth quarter.
And additional $2 5 million benefit related to an annual vendor incentives excuse me.
Finally, we had a $6 4 million linked quarter increase in other noninterest revenue. This increase was really driven by various items in the $1 million to $2 million range, including federal home loan bank dividend income SBA volume.
Credit related fees.
Moving on to expenses, which are highlighted on slides 16 and 17.
Total adjusted noninterest expense increased from $279 3 million for the fourth quarter of 2020 to $305 2 million for the first quarter.
2023, if you recall, our fourth quarter conference call. We indicated that the run rate was closer to 290 million, but you factored out there, yes at year end accrual adjustments approx.
Approximately 7.3 of which was related to employee benefits. In addition to this variance approximately $5 million of the change in salaries and benefits. This quarter was related to seasonal increases in payroll taxes, primarily from the FICA resets.
With the majority of the rest of the increase driven by increases in insurance commissions linked to strong revenue this quarter.
The linked quarter increase of $2 4 million in FDIC insurance is of course, largely driven by the two basis point increase in the assessment rate effective in the first quarter.
Well there are several other puts and takes the increase in other miscellaneous expense as a result of a number of items, including the impact of a fourth quarter benefit of $1 6 million related to franchise taxes.
And regarding first quarter items, we had an increase in fraud losses of $2 4 million, which is in the process of collection over the coming quarters.
In addition, the portion of pension expense that is recorded in other expense increased one 7 million as a result of higher interest rates impacting the discount rate.
SBA expense also increased $1 6 million on increased volume.
<unk>, which also positively impacted the revenue as I mentioned earlier.
The remainder of the increase driven by various smaller items several of which we detail in our slide deck.
Going forward, we expect second quarter adjusted expenses to be below $300 million and closer to the 290 million baseline, but we discussed last quarter.
And trend downward from there in the latter half of the year as the impact of the branch optimization and other efficiencies realized partially offset by the third quarter Merit cycle.
Longer term efficiency ratio target remains below 54%.
Regarding the non routine adjusted items merger and merger related costs were $14 million, which is a significant decline from the $53 million in the fourth quarter period that included our franchise rebranding and of course system conversion.
The largest component of the first quarter total is related to one time employee compensation agreements and certain trailing system decommissioning costs. We expect these merger and merger related costs to decline by more than half in the second quarter.
We continue to dwindle when they complete later this year.
Finally, some additional color on the credit picture, which is shown on slide 10 and 11.
We are pleased to see net charge offs continued to hold at low levels totaling just $1 9 million or two basis points annualized for the first quarter.
Dan mentioned, we had a provision of 10 million for the quarter, which was necessary to support the loan growth we reported for the quarter, resulting in a stable ACL coverage of 145% of loans.
N P A's as a percent of assets ticked up compared to the fourth quarter, but it's relatively flat with the first quarter of 2022 and continue to compare favorably to historical levels.
From a nonperforming perspective, the increase was driven by two larger C&I credits and additionally, approximately $12 million of the increase was the repurchase of government guaranteed loans, primarily SBA that we previously sold in order to fulfill our collection obligations.
It is important to note that $43 million of our total N P. As our government guaranteed SBA and FHA loans that were required to repurchase while working through the collection process.
These do have a longer resolution cycle, but a significant portion of these dollars in excess of 75% are guaranteed from a loss perspective.
Given our active participation in these markets that does elevate our nonperforming numbers somewhat.
And our criticized loan perspective, we are seeing some impact in grade migration as we collect year end financial information and incorporate it into our credit model. When you have referenced in past calls.
Patient is that interest rates may have some credit may have some impact on credit and while we are seeing it in some of the grade migration. We are also seeing.
<unk> past students across all geographies and business lines.
In short, we have not experienced any systemic trends or themes and types of loans geographies et cetera and.
Results to date aligned with expected grade migration for a credit cycle with increased rates.
So looking back at what was an interesting quarter for the industry. Our performance highlighted the broad strength of our balance sheet, our resilient net interest margin and the revenue streams and the clear differentiating value of customer relationships, having both a rural.
And metro footprint, and a community plus corporate business mix.
We also demonstrated our commitment to refining our branch footprint and driving ongoing operating efficiency Athene.
A theme that is a key focus for us, particularly through the rest of this year and into next.
Operator, we would like to now open the call for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
We ask that you please limit yourself to one question and one follow up for today's call you may rejoin the queue. If you have additional questions. At this time, we will pause momentarily to assemble our roster.
And our first question here will come from Brad Millsaps from Piper Sandler. Please go ahead with your question.
Hey, good morning, Hey, Brad.
Thanks for taking my questions Valerie.
Thanks for all the color around the margin and other details I was curious if you might be willing to provide sort of <unk>.
Spot loan and deposit rates at the end of the quarter, obviously, a lot of moving parts like every bank, but just kind of wanted to get a sense of maybe where some of those deposit rates were at the end of your call at the end of the quarter.
Yeah, absolutely Brad.
So at the end of the quarter, you know I'd say new loans.
The month of March were coming in around the 7% level and that varied a little bit depending on the type of loan obviously.
New Cds, if you backed out what was brokered we're actually renewing at about a 1.5% right.
And there have been a number.
Cds that were part of the growth this quarter.
Quarter, but we're actually between four and 5% as partisan emotional activity.
And then Chris I don't know if you want to add a little color on some of the money markets and so forth.
I've got the loan numbers pulled up because you can jump back in here the production in the fourth quarter came on at an average rate of six and a quarter loan production in the first quarter came on at an average yield of 704.
Bruce nothing to add that you guys covered it.
Yeah.
Okay, and Valerie and then just to kind of delve into your guidance around the margin staying flat or moving up a few basis points should we assume that you plan to take some of the cash that you had at the end of the quarter, which I think was above $4 billion in pay down.
Some of those advances that you brought in at the end of the quarter.
Is that kind of the.
A bit of mix change that we should see there to kind of keep the keep the margin flat.
Yes, exactly I do think that will probably continue to have a little bit of excess liquidity.
At least in the near term and that could swing a little bit depending on volatility in the industry, but absent any of that then yes, we would use those dollars to pay down the borrowings.
Okay, Great and then final question for me just kind of bigger picture on credit I know some of these numbers are moving from very small numbers, but just wanted to get a sense, where the loans that you are seeing migrate are.
Are these loans that would have been originated since the merger happened or would these be legacy bancorp south loans or more legacy cadence credits or maybe a mix just trying to get a sense of kind of kind of the key drivers there. Thanks.
That's I think the easy answer is all of the above but go ahead, Chris vintage vintage is not since the merger. They go back two and three years once the legacy be excess that we lead ones are legacy Cade that we're a participant in.
Color there is there is.
Theyre not related to each other in any way a different industries.
No really tied to.
Any kind of trend that we can think of them from a credit perspective.
Great Great. Thanks, Chris I appreciate it.
Thanks, Brad.
Our next question will come from Manhattan Casella with Morgan Stanley . Please go ahead with your question.
Hi, good morning.
I appreciate it.
Good morning, I appreciate all the color on the on the expense side.
I was wondering if you would help.
To help us with you know how we should think about expenses exiting they are.
Given you mentioned that the run rate expenses should be about 290 million next quarter heading lower from there given given the branch got you and the other actions you are taking.
I think you also noted that you will identify and execute on additional efficiencies. So I was wondering what the.
What the exit expenses would look like as we go as we go into the fourth quarter of 2003, and then as we think about 'twenty four does that mean that we should see expenses actually declined on a year on year basis or are they all blood pressure is coming through from from inflation as we think about 'twenty four.
Yes, let me take a stab at that a little bit better than you can jump back in on some of your comments that you made but thanks.
So great question and we continue we're less than six months past consol.
Consolidation of our two back through the merger and the consolidation of all of our systems, we continue to look for and find and harvest.
Efficiency initiatives I don't have a number of what some of that turns out to be as we work through the rest of the year. We certainly wanted to let you know what we were doing now and so you've seen those numbers, we continue to try and push down on expenses or you need to go through the details behind what you were putting out there for what you think will look like in dollars going forward.
Yes.
And then I would just circle back around to your question on kind of the exit expenses regarding the branch closures.
I don't have an estimate for you know those are generally.
Not significant we actually own about two thirds of the locations and the others.
And so.
There won't be a huge amount of exit costs associated with that however, we will be sure and isolate that.
A separate line item in the earnings releases going forward, so that would be very clearly definable.
And then like I said in the release the first quarter always has a number of unique items and the payroll taxes and all those kind of things that went on throughout the year.
We are expecting closer to between 300, and 290 million level for the second quarter and then <unk>.
Layering in for the third and fourth quarter.
The savings from the efficiencies of the branch closures.
15% to $20 million on an annualized basis to obviously getting closer to half of your impact on that for 2023.
Got it and then it looks like Youre absorbing some of the upward pressure from inflation there as well.
Within that number.
Yeah those numbers include inflation.
Inflation impact merit increases.
Of course that the increases that we saw in the first quarter.
The Ses estimates and pension costs and so forth.
Got it alright, perfect and then.
Separately.
You've made a comment earlier on the call that the credit tightening is very apparent in the industry can.
Can you talk about what you're doing on.
On lending standards.
And just generally how much you think.
Loan growth is going to be impacted from bullets diving lending standards as well as weaker demand.
Yeah, that's a great question and we're certainly seeing the demand pullback you heard the comments that our pipelines are declining a little bit we do have some tailwind. So we continue to feel the tailwind of construction and CRE loans that were booked in prior quarters that will fund up in 2023, but we're definitely seeing a slowing pipeline in the.
<unk> demand coming through we like I think most of our peers Hank and Chris can jump in here are certainly taking a tighter look at what we're seeing so I think we would expect to see the loan production, while we've got a good tailwind with the book loans that will fund up throughout the year. The current production continues to decline.
Yes, I think both the bank and our clients are taking a more conservative approach interest rates are impacting.
The uncertainty around economic forecasts.
It just slowed down some of the pipelines that we're seeing so Dan covered the tailings we have from a color perspective, I think you have anything to add there I'm in full agreement that I would say the RMS that are out there from a deposit perspective, a lot of emphasis there and continuing to grow those but yes. We are seeing an overall kind of wait and see attitude within the markets from a loan perspective.
<unk> was also what are we seeing in the way of credit tightening are we seeing any experience with other banks. What are we getting better terms are we getting better conditions I think in general there is more equity going into projects that are speculative in nature. If they are being done at all and just maybe more loan agreement covenants tightening there and the <unk>.
Only a requirement for deposits to play the ancillary is definitely in play at this point and very important to the relationship.
Okay.
I appreciate that those amounts are thank you.
I appreciate it thank you.
And our next question will come from Kevin Fitzsimmons with D. A Davidson. Please go ahead with your question good morning, Kevin.
Hey, good morning, Dan I hope everyone's doing well.
So as I look out for me.
Think about the pace of loan growth in deposits going forward is it.
Is it reasonable to assume those are going to be more there's going to be relatively aligned so if.
In terms of there is an ongoing mix shift within deposits, but to the extent that.
Youre going to go out and pay.
Pay for higher cost Cds and money markets.
Youre going to peg that off off loan growth, which slowing so.
That's all a long winded way of asking should the loan to deposit ratio stay relatively stable or do you think that will creep higher.
We would certainly like to be able to grow deposits to hold with loan growth. We certainly got capacity to not do that so when we came into the year. We were talking about the fact that we could grow loans this year and see the loan to deposit ratio climb higher we certainly saw that in this quarter.
I think we would like to see deposits grow, but as you heard Chris say.
What's changed there has been no today to make a loan today you need some deposits and that wasn't always the case for all banks. So certainly we've been leading with deposits for a long time, but many of our peers and others are now requiring that.
Some of our peers were completely wound up until they've got a little bit different position than we're in today, but we want to make sure that we're making good strong decisions and were certainly asking our team.
I mentioned that just a second ago, we're certainly asking our team to lead with deposits on a regular basis. Thank you want to add onto that.
Absolutely I would just say that from a over the last 30 35 years I think we've had two years, where deposit wasn't a focus of the DNA is there and the understanding of the liability side of the balance sheet from the RMS is a real focus obviously, our legacy our friends at legacy they access had a strong granular deposit base and we're going to continue to build on.
That as well.
Yes. So when you saw when you saw deposits in the quarter I think you heard that.
The comments the community bank actually grew deposits in the quarter and we would look to continue to be pushing that out there.
The other thing I would add to that.
Securities portfolio has room to decline a little more comfortable in the 15% to 20% of asset range.
And just this year.
Anticipated 1 billion and a half of cash flow off of that securities portfolio as well that can help that that loan growth.
Got it thank you.
One question kind of bigger picture question on just the.
Deterioration or that the linked movement, we saw in non performers and I know Brad mentioned before that it's coming off of low numbers.
But we also saw a pickup in special mentioned so is this just really the piece.
All right.
Was there any kind of more.
I don't know how to maybe maybe call it a more proactive or aggressive scrub.
Given that we're looking ahead to a slowdown in the economy that might have.
Celebrated some of that migration on credit.
I think we have a pretty aggressive process in place all the time, but Chris can talk about where we are today I.
Nonperforming first so you know we mentioned the two C&I credits that drove that in addition to that you see you saw that $12 million that I would call government guaranteed type increase I think it is important to note that those things have a long collection cycle. So when you look at that $43 million or so it'll take us several months to move through those we would expect to see more of that.
<unk> come through I think is we're just we're a big player in the mortgage and SBA.
Loan originations. So I think we will see some of that.
From a criticized perspective I would call that a normal we look at those on pretty much a quarterly basis, so as financial statements come.
Come in we get updated we get the models updated that's a normal ongoing process for this and I think you've heard us say in previous calls we expected interest rates to have some impact and I think we're seeing that so you take the inflation and wage inflation, you take the inflation and interest rates and that drive some of the EBITDA and debt service coverage, that's what's driving some of those model changes.
When we look forward going forward, we will continue to pull those numbers in and adjust accordingly.
We're not seeing any general trends most of it's in the C&I book, we are seeing in the migration. Some of the CRE book is holding up really well right now there's been a lot of talk about office. We don't have a lot of that its very granular very small average loan balance that's performing very well in our books.
I'll turn it over to Kathy anything to add.
<unk>.
Well said.
Hey, Kevin.
Thank you guys.
Okay.
And our next question will come from Brett Robinson with Hefty group. Please go ahead with your question.
Hey, good morning, everyone, Hey, good morning Brook.
Wanted to start with just the retail deposits and I know, 76% of the deposits are defined in the community Bank.
But just given the low deposit number in terms of average size for the for the retail can you guys. Do you have a number for how much would be retail versus commercial from a dollar basis.
Is that in our deck that theres, a whole lot of new disclosure in the deck I got to flip through there to find that for you I don't know if you went through the two.
Right.
So I got to get to the right page.
Six as well.
You may be able to go forward.
Yes.
Bank segment, but I don't know if that actually means that you would call those retail or if you would have some commercial in there as well so no theres absolutely commercial in there too yeah. So so that's talking about where the customer is talking to us. So the community bank as the 350 plus branches that we've got out there and all of the customers that they talked to from smaller businesses to some larger businesses the corporate.
Group and the corporate deposits are all in the corporate bank, which is our larger.
Corporate relationships, so you've got delivery channels as how we broke that down so 76% is in the community bank. So that's again, mostly the rural South but includes Houston, Dallas, Austin, Atlanta, Tampa, Nashville, et cetera, and so youre going to have corporate deposits in those markets and you've got corporate deposits in smaller communities also.
It's just it's more heavily weighted towards the consumer and small business.
Okay Frederic.
But the mix of the total deposits is about 44% consumer account.
Consumer balances and about 36% commercial balances that helps okay perfect.
And then wanted to ask about the loan growth, obviously, a lot of our loan growth with Texas, and other which I assume means kind of lines of business health care and the other businesses can you talk maybe just about that growth those pipelines and then if if.
Lines have been with us from <unk>.
Cadence classic if those might be the drivers going forward, if theres opportunities more in those and those time silos.
I like that cadence classic I like that what's going on.
Data as a classic.
It's a good one I like that.
So as we've indicated that our pipelines have moderated to some degree we're still seeing active.
Activity, just not as much as we've seen historically.
CRE book.
As previously mentioned has kind of a built in growth.
Engine and they're currently obviously, we've been we feel like we've been very disciplined in the underwriting there and like that portfolio will continue to be active in all of the specialty lending groups.
We had at cadence classic certainly I've said that right that's the legacy Cade.
Yes.
Yes, if you look at the growth in the quarter I think it was about a third a third a third generally from the real estate side, primarily driven by the larger corporate pieces that was multifamily and industrial.
The biggest percentage of that we also had nice increase in our mortgage book so the ability to write.
Hilton portfolio mortgages is a win for us and the rest of it was maybe a general kind of I'd put call. It general C&I and community Bank has a tremendous amortizing loan portfolio. So we get a lot of cash flow from that and that's where we've seen the slowdown in the pipelines first the Canadian bank is.
This because of that headwinds on their amortization, it's tougher for them to grow in an environment like this and we're seeing some nice opportunities in some of our business segments energy still have some nice opportunities the renewable piece, so thats working pretty well for us in the recent months building products with us today to believes our chief credit officer on the corporate side 1 billion I know you can cover.
Some of that.
Yes sure.
You guys covered it pretty well, but the color I'll add is that a lot of our approvals that we've been doing have been at.
Higher price points more ancillary that's been covered but the structural discipline has been there too so while we're getting a lot of looks.
Also losing some deals because of those structural enhancements, but we're winning more than our fair share I would say, so where we're winning we're winning tight.
Tighter standards.
I don't want to say that credit is tightening, but we're able to win good business at tighter standards, which is good for us going into the cycle. So that's really the point I wanted to make that I hadn't heard come up yet.
Thanks Billy.
That's great if I could.
And one last one on fee income.
Valerie I didn't quite get to the linked quarter and <unk> 23, obviously other was up SBA and some other lines, but typically insurance a stronger into Q does it makes sense to <unk> fee income this is better than <unk> or.
Insurance is typically the highest in <unk> Brook, and then will drop off a little bit into Q and come back again in <unk>. So the best quarters for insurance for US historically, you have been <unk> and <unk>.
That part of a drop off in <unk>, but not as good as <unk> Valerie I'm, sorry, I jumped in on yet.
No that's fine.
We would expect card fees to.
Perhaps a little bit in the second quarter, you know they tend to be seasonally low in the first quarter. So that's an area that can continue.
Obviously, our wealth and our brokerage.
Businesses continue to really build upon themselves and so modest growth throughout the year is what we're looking towards there and then on the mortgage banking teeth. They had really nice origination of last quarter.
And slower Paydowns and so that combined led to some of the improvements in the first quarter and just.
Just kind of dependent on what we see it as coming up into the buying season, which should continue to see.
Nice revenue continue to come up then as well, although obviously at a higher rate environment. When do you expect that to be a material change.
Quarters I.
I remember the deposit fees, both card fees and deposit fees day Count is also a factor there too certainly business days so.
The low day, count and <unk> has a negative impact on the deposit fees and the card fees a little bit.
Perfect. Thanks for all the color thanks, Brett.
And our next question will come from Catherine Mealor with <unk>. Please go ahead with your question.
Thanks, I just wanted to circle back to the margin.
You mentioned you added $1 6 billion of brokered Cds late in the quarter can you remind us.
What the average rate is on the team and the.
The maturity.
Yes sure.
The average maturity at the end of the year or at the end of the quarter rather was about five months, so really pretty short.
And the average rate was just under 5%.
Okay, great. So part of your I.
Outlook for the margin to improve.
Or maybe the bond restructuring to be accretive in the fourth quarter as part of that as we run off these brokered Cds annuity we kind of.
Redeploy some of the cash.
I don't know any borrowings that way.
Yes, obviously thats all factored into the margin.
<unk> as far as the $10 5 million of incremental.
Securities sales, that's really completely different.
<unk>.
That actually had to do more with the reinvestment dollars.
But yes on the brokered Cds run off.
We anticipate that those will be used.
Likely either.
Additional investments are fund loan growth.
That will obviously be better yet.
Great Okay great.
Okay.
And so as we look at excess cash.
I guess what is your how are you kind of feeling the pace of deploying that excess cash flow look like over the course of the year.
Yeah, I think that I mean in the near term, we may run with about $1 billion or so of <unk>.
Excess cash.
Again that can vary.
Significantly depending on volatility enormous strength you'd want to make sure that we have excess cash just to be.
Prepared.
And so that could vary but otherwise.
That's come down fairly quickly and be managed at that level.
We wanted to make sure we have plenty of excess liquidity, obviously through the month of March after things started blowing up and we want to make sure. We've got plenty of liquidity going forward too.
Yes, because I think about stable to up margin and then you kind of a bigger balance sheet with the cash.
Any kind of outlook or commentary you can give on just dollar NII growth for the rest of the year.
Yes.
I think that just like we saw in the first quarter, we saw the Bailey.
Net interest income growth.
<unk> to the fourth quarter.
With the expectations on loan growth and if we can get the stability on the deposits that we're anticipating throughout the year. Ben we do believe that that won't be able to continue to grow from a dollar standpoint.
Modestly throughout the year.
Okay great.
And then maybe just going back to the credit file or you mentioned that youre seeing.
Negative migration within classifieds at quarter end do you think that impacts your ACL overtime.
<unk> got such a high ACL given given the merger.
I think negative credit migration I mean, do you think we have.
Kind of a stable ACL from here or there.
What do you think would actually take that ACL to build from these higher levels.
Yeah.
And I think that that to build it meaningfully would require meaningful charge off.
There's a lot of.
Variability, obviously in all of that.
Assumptions, one being significantly the environmental impact and.
I think that there is potential for that environmental impact to have a longer term positive outlook, Oh, I don't think that will be taking that view in the very near term, but I do think that that is something that cannot be easily be offsetting.
As the potential downgrades, if those were to occur in the upcoming quarters.
Right, Okay, great. Thank you.
Our next question will come from John Armstrong with RBC capital markets. Please go ahead.
Hey, good morning, just a few follow ups here.
Community Bank deposit increases what do you think the driver of that was with the CD driven rate driven or was it something else.
Yes, I think the CD is certainly play in there because we've just like everybody else. We've got rate specials I think our team does a great job of playing hand to hand combat.
We've got a lot of customers out there.
I think the team is involved in what's going on in the market and we've been pushing them hard to grow deposits, Chris you want to tag onto that.
Yes, we'd actually instituted and kicked off a deposit and emphasis promotion well before the events in the March and the quarter. So some of that was part of our.
Our plan in some marketing and some outreach we were already doing but with Dan's right. It's it's granular it's across the whole geography, and it's reaching out to existing relationships and new clients.
Theres been some banks probably trading deposits across the street.
Given the recent events and that's probably part of it too and we've won our fair share of them.
Okay.
You've got some good news slides in your deck, but on slide five.
That 98% number.
And the 70% number so 98% of accounts are.
Insured.
70% of the dollar amount of insured what did you hear from the 2%.
That was uninsured and maybe the 30% balances that were uninsured. What did you guys hear from them mid March and after and any any outflows of magnitude yes.
So let me let me make sure we're saying that correctly, so 98% have developed have balances less than $2 50.
It doesn't necessarily mean that all of that's insured because they could have multiple accounts on the same day. So.
That's a that's a 98% of less than $250000 on the account and what we heard from customers and we certainly ask our relationship managers and branch folks to be close to customers throughout the process and they are still doing that today.
There was a little bit of concern certainly the nonprofits is where we saw some stress points. The large nonprofits, we're wanting to make sure that they were taking care of our customers again as I said at the very beginning were mostly business as usual they were looking to see what kind of what's going on certainly the fear factor play down in the news was talking every day.
Felt pretty normal behavior, we had some customers and some of the larger customers. So John when you when you walk back.
One of the things we've talked about <unk>.
During the quarter was that we were at 67%.
Ensured our collateralized at the end of the year and so that number came down which would indicate that some of those large deposits went out and then some of the growth that we brought in we saw loans, we saw deposits coming in at under $2 50. So I think we had some growth on the smaller ticket sizes. We certainly saw some reciprocal deposits lots of customers who are using them.
Insured cash sweep for the Ics product.
So we saw some movement in that area, but again, we're mostly in the <unk>.
While the economy appears to be humming, along maybe a little better than other parts of the world and so we feel like our customers are in pretty good shape.
Okay. Good.
That's helpful. And then just one one more follow up on.
On credit how far along are you guys through the cycle of collecting yearend financial information from borrowers and kind of what's left I would assume it's smaller borrower.
Borrowers, but I thought I would ask that.
Yes on the corporate clients were probably almost completely there with with even with audits for the most part smaller clients typically that's tax return driven take little bit longer cycle, but most of those are amortizing credits, so you'd get to monitor those on their payments and their pass through status.
We've Ah <unk>.
That's a focus for us so we take a look at everything of size and we're focused on getting that information and so we can properly grade those credits.
It feels like you are through the bulk of it though is that fair.
That is fair.
The 30 to 89 day past dues actually was very very well in the quarter. So is that is we actually in near term past dues 30, 30 to 90 days were down for $4 million. So is actually flat to down a little bit so that was a good sign.
Okay Alright, thank you I appreciate it thanks John .
Our next question will come from Brandon King with true Securities. Please go ahead.
Okay.
Good morning, Brandon.
Yes. So in regards to the 35 branches that you're closing could you walk us through the decision, making process behind selecting which branches to close and could we potentially see more branch closures potentially.
Potentially you know beyond the 35.
Yes, great question.
We've identified the ones that we can close so I don't anticipate that you'll see another run of that here anytime soon so you go through an elaborate process. So we look at.
Each branch what the size of the branches from a deposit perspective, what the transaction volumes are what types of transactions are there what kind of new business is flowing into that branch how close do we have other branches coming by what type of adoption to other.
Delivery channels or is that customer base using from the adoption to mobile or digital deposit processes and so thats. The process that you go through and identifying what's there and I think what the team did a great job of identifying branches that we can.
Move out our clothes in the system without putting a whole lot of deposits at risk.
Okay and was it.
Okay.
Okay.
Branches or was it.
That's more margin to work some qualitative factors that were a part of that decision process.
You cut out on me for a second there so I'd say that one more time.
Okay.
In these branches versus you know the rest of your footprint or was it.
Yes pretty marginal.
Based on some metrics.
But again Unfortunately, I think your microphone is not working well, but we were looking at the entire branch structure. So again the size of the branch size of deposit size of loans.
How close we were to other branches, what kind of new business was coming in and those were all the factors. We were looking at I haven't heard your question clearly yet I'm sorry.
Can you hear me now.
Yes.
Okay well.
I'll move on in regards to capital is there any increase appetite for share repurchases I know there were any repurchases in the first quarter, but given where your stock is trading right now is there any increased appetite.
Yes, I would like to be there, but I think as we are flying into.
Potentially darker clouds and potentially unknown in the economy.
I think our statement today it would be the same as it was last quarter I think we're going to sit where we are and hold the capital of the holdup powder.
Would certainly like to be able to take advantage of a price where it is but today I would tell you I don't think thats in the cards anytime soon.
Okay.
My question. Thank.
Thank you Brenda.
And our next question will come from Matt Olney with Stephens. Please go ahead, good morning, Matt Hey, Thanks, Good morning, everybody.
Valerie I appreciate all your thoughts on the margin can you just clarify your thoughts on deposit beta expectations in <unk>.
Let's see what the full impact of those brokerage Cds that came on late in the quarter. You think you can improve on that 59% that you disclosed in the first quarter.
Yes.
That is.
I think the big batch of question there is how much mark.
Is that what we have from the noninterest bearing to interest bearing that's really going to be the driver.
I think the biggest piece of that.
That and so we.
We said, we thought quite a bit of movement in the first quarter and there was a much more significant rate in the first quarter.
What we're modeling is actually went right news in May and then stability after that until we get towards the end of the year, then potentially kind of bond and filling that hole.
We are actually modeling that that.
Mix shift.
Was it down.
And that is what is driving our 30% cumulative beta.
Don't expect that that mix shift will continue.
Our new model out and.
That will actually go down again.
The assumptions that we had put in the rate environment right now.
Okay. That's helpful and just following up on that Valerie any any good evidence are good data points that suggest the.
Mixed shift is slowing in recent weeks as you look at the.
Maybe balances since the quarter end.
I think first quarter, and we call it pretty much business as usual and.
I don't think Theres anything of note that.
We would call out there Chris Dan.
Yes.
Bruce.
Interest rates are driving some of that there's just a lot of energy out there about interest rates, we're trying to keep all that short so keeping the comp.
And the competition is doing the same everybody's can.
Competing on short term right now.
Okay.
The commentary and then I guess switching over to insurance I think Dan we've talked about the insurance segment of cadence and.
And we've seen some.
Investing transactions in recent months in the marketplace that had been pretty well received I'm curious about your updated thoughts on cadence insurance and the openness and willingness to perhaps monetize this in the future.
I appreciate that we like the insurance business and let me clean up where it was.
A minute ago on on revenues.
Brian is not all the way on the question earlier was on what his insurance it looked like in <unk> contingency revenue and cleanup of that gets spread we used to record all of that in the first quarter, which drove the first quarter higher now, it's a little more spread and so when you look back at second quarter is actually higher than the first quarter and I would assume that we wouldn't see the same thing we saw good.
Organic growth on the insurance team, a little over 10% and organic growth new customers and new business last quarter. So we were pleased with that your question is more on what are we looking at.
Same as the question on any other M&A activity, we're always open to looking at and reviewing opportunities we like the business lines that we're in we think that we have worked well together we liked the fee business that we generate but just like anything else whether it comes to selling the bank or buying a bank or buying insurance, we just bought a new insurance agency.
Last quarter, we continue to look for opportunities that we think will benefit our company.
Okay.
Thank you guys.
Thanks, Matt.
Our next question will come from Brody Preston with UBS. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions.
I did have I did want to follow up just on the margin question Valerie.
I think in response to match you gave some some good color, but I guess I wanted to put a finer point on the betas. What are you assuming for an interest bearing data within that total deposit beta assumption and what is the noninterest bearing mix that youre assuming.
And lastly, what is your expectation for purchase accounting accretion.
Okay sure first I'll take the purchase accounting accretion I'm expecting $24 million in scheduled accretion.
For the full year that included what we experienced a $10 million in the first quarter. So it does slow down a decent amount as we get into the next few quarters and into 2024.
On the deposit beta is really well I think I'd focus on is the cumulative beta.
30% and the reason we do that has that incorporates that move from the noninterest bearing into interest bearing.
And.
It really kind of a gradual increase as we go through the year.
Lee.
We get the last rate increase in May and we are projecting that I would expect that to stabilize out in probably in the latter half of the third quarter.
Okay understood and then I wanted to follow up on the expense guidance.
You throw out the possibility of maybe getting closer to the $2 90 level for the second quarter.
I think you called out $5 million of seasonal expenses at least as it relates to <unk>.
Salaries and benefits in the first quarter. So I guess, if I think more about our non seasonal number is 300 to step down to 290 is relatively large that's about a three 5% decrease in so what are the what are some of the items that.
That will move lower and are there any specific actions that youre taking beyond.
The branch closures that you called out for the third quarter are there anything is there anything you've done in the second quarter.
That should help us see that number come to fruition.
Yeah. So there's.
The focus on efficiency has been something that has been key.
Key in our minds really since before that system conversion and then as Sam mentioned, we had the system conversion in the fourth quarter of last year and so incrementally we have been working on that there are a number.
Continued system tweaks and refinements in our processes have merged together that we're rolling out the timing of some of those things could be earlier, so it could be later.
And so that's why I gave a little bit of a broad range. There on the second quarter expenses, you mentioned, the payroll taxes and that kind of thing those Tien tsin dwindle down, but you'll have some of that obviously in that in.
In the second quarter, but it will be less impactful as it was in the first quarter.
The products that we had this quarter was unusual and certainly we are hopeful that does not repeat.
Repeat itself into the next quarter.
And then Theres just a few other things that do tend to be heavier in the first quarter some of the annual mailings.
Some of those types of things.
Surely.
Come down as we look out through the year.
We're continuing to work on the efficiencies to build into that.
The timing of that is a little unpredictable right now until we get to some of the branch closures and some of the other things that are in process.
Just as a reminder, so the branch closure piece is scheduled for the middle of the third quarter. So you won't see a full quarter benefit there.
Just like Valerie said I think we've always been focused on and will continue to be focused on.
More things that we can do again, we're less than six months past systems conversions. We've got we've got work to do to continue to drive a more efficient operation.
Got it. Thank you for that and then just on the on the credit front I did just wanted to follow up on the on the C&I Npls.
I think the average size there is about $20 million I guess I would ask is that fairly reflective of some of the other size C&I credits you have in the book or is it is it smaller than that.
Yeah, we've got C&I credits that range from less than $1 million to more than $20 million. So certainly in our corporate group $20 million is going to be right smack in the middle of the sweet spot Hank jump in here.
That's exactly right.
We've had a history of kind of playing in that range and as the bite size that we take on an average basis.
Got it and then I would ask just one last one Dan I know, Matt just asked about it and you've been asked about it in the past I'm being a little bit of a dead horse on the insurance front, but I do think that the longer I think I remember the longer term efficiency ratio is at 54% number when it sounds like there's other kind of things that you're reviewing them maybe.
To get there over time, but when you look specifically at the insurance business and the attractive valuations that are out there for insurance businesses. The insurance business is obviously, one way to improve the efficiency ratio and potentially earnings per share. If you. If you depending on what you did with the excess capital in a sales scenario, but it would be ROA and Roe.
Dilutive.
Given the small asset base and a little equity consumption that it takes up and so strategically how do you think about those moving parts when you're evaluating that business line and why is keeping that business more beneficial to cadence right now than strategic alternatives.
Yes, I don't know that there is a right or wrong answer and that I think we want to make sure that we look at all of the parts of the puzzle. That's what I was trying to say in the earlier answer was were not for or against I think we want to continue to look at opportunities we want to measure the entire picture all of the measurements like you said some some things are going to be better some things are going.
Be worse.
That's just part of what we do as a company when all of the acquisition targets that we look forward. So I would tell you that I don't know that were locked into any answer, but we like the business that we run today. We're pleased with the process that we've got in place now that doesn't mean that we cannot change our mind, but we like what we're doing today.
Got it that's all I had thank you very much for taking my questions everyone I appreciate it.
I'd go back on Brody's question on that on the NPA. So yes. The increase were two larger credits, but when you look at our total NPA is the average is 398000 I couldnt do the math fast enough. So to the average <unk> 398, four that C&I book for that C&I book. So I think it's part of the two companies came together if you were a legacy <unk> or we had a much smaller.
Granular average loan balance at your legacy Cade you'd see bigger numbers I think that's the industrial logic for the company coming together, that's part of the part of the good side of the story, but yes. Those two that we had this quarter, where larger but theres also a granular component to that C&I book.
Got it thank you for that.
Again, if you have a question you May press Star then one to join the queue.
Our next question here will come from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions.
Most have been asked and answered, but I did notice that the AUM at the trust business was up 15% sequentially can you just give us some color there and obviously the fees were up as well just any sort of outlook there would be helpful. Thanks.
Good to hear from you this morning, Michael good to talk.
I think most of that is market driven so if you've seen the market bounce around the team has done a good job of managing assets about where you want to jump in on that we're really proud of what our we've got remember we've got our General Trust team and then the part of the legacy cadence was a registered investment adviser both sides of that business has done very well for us in the first quarter.
Yeah, No I agree with what Dennis said the other thing I'd add is there is a component of that is a little bit cyclical.
In the custodial piece that tends to be a little higher at the end of the first quarter.
That is factored in and.
Some of the market impact and then some net inflows from customers just like many customer spot.
There are many banks saw some of the funds flow.
Out of their deposits into some of their investment patterns, we've talked a little bit of that as well and that that helped bring some of that.
Yes, that's a good point some of the some of our own deposits migrated there as we were bringing some other deposits and we've had some nice wins and it's nice to have that in our toolkit to be able to help our clients.
Exactly.
Understood I appreciate the color and maybe just.
One final one for me I think we've got over the deposit beta piece, a fair amount here, but just on the loan beta side.
Obviously, that's had a nice progression as well and it does seem like.
Given where your loan to deposit ratio is here.
Had a little bit more capacity than maybe some other banks out there, but any sort of venture as to what the.
The loan, but the cumulative loan beta expectation could be thanks.
I'll speak to the beta I'll, let batteries Valerie do that because she's got the calculator for all but one of the things we've talked about it hasn't come up yet. This morning, we've talked about it now for multiple quarters going back is higher for longer as a benefit for us.
The balance sheet is set up and so we continue to believe that that's the case for a spell or you want to talk specifically about the data.
Yeah. So we've been fairly consistent in the past couple of quarters as you've seen on a quarterly data and a lot of that is driven by not only the new loan growth that we've had that's been nice in that quarter, but outside of a repricing and so we.
We expect that it will actually maintain.
Familiarity there as long as their rate increases and then.
EBIT after their rate increases, we expect that the loan repricing will come into play and we've got a slide on that on slide 14 that shows the timing of some of that loan repricing there isn't good amount, 43%, but accident rate prices for the next 13.
<unk> I'm, sorry, <unk> 13 billion re prices in the next three months that'll obviously help support that.
Typically over the near term.
Okay. That's helpful. That's it for me thanks.
Thank you Michael.
And that concludes.
<unk> our question and answer session I would like to turn the conference back over to Dan Rollins for any closing remarks.
Alright. Thank you everyone again for your questions and participation today and in closing I would just like to reiterate that despite the industry uncertainty regarding rates and the broader economic outlook. We remain very optimistic as we look to the remainder of 2023, we have a very granular stable core deposit franchise, a diverse loan portfolio strong allowance for credit loss.
Coverage and additional the diversity of the various fee businesses that further differentiate us from our peers. Thank you all again for your joining US today, we look forward to speaking with you all again very soon.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.