Cadence Bank (NYSE:CADE) Q4 2022 Earnings Call Transcript

Cadence Bank (NYSE:CADE) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Good morning, and welcome to the Cadence Bank Fourth Quarter 2022 Webcast and Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Will Fisackerly, Director of Finance. Please go ahead.

Will Fisackerly: Good morning. Thank you for joining the Cadence Bank fourth quarter 2022 earnings conference call. We have our executive management team here with us this morning, Dan, Paul, Chris, Valerie and Hank. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our Investor Relations page at ir.cadencebank.com where you’ll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon. These slides are also in the Presentations section of our Investor Relations website. I would remind you that the presentation, along with our earnings release, contain our customary disclosures around forward-looking statements and any non-GAAP metrics that may be discussed. These disclosures regarding forward-looking statements contained in those documents apply to our presentation today. And now I’ll turn to Dan Rollins for his opening comments.

James Rollins: marked a year of tremendous change, progress and success for our company, highlighted by the fourth quarter completion of our rebranding across our footprint and the related systems integration. The results of our business development efforts will be discussed this morning. We’ll validate the unity, optimism and excitement shared by our teammates, as we are now operating under one name and brand. As we look at our annual and fourth quarter 2022 financial results, the story lines and key highlights are very similar for both the quarter and the full year. So I’d like to make a few comments about both of those. We reported adjusted net income for the fourth quarter of $142.9 million or $0.78 per common share, which resulted in annual adjusted net income of $542 million or $2.94 per common share.

Adjusted PPNR was $195.5 million or 1.62% of average assets fourth quarter. We continue to benefit from a strong pipeline, which is reflected in net loan growth of $1.1 billion or 14% annualized for the fourth quarter and $3.5 billion or 13% for the full year. Our fourth quarter results were again very diverse from a product and geographic standpoint. We had six of the seven regions within our Company report net growth for the quarter and our corporate banking team had another outstanding quarter. We also continue to see favorable results from many of our specialized industry verticals, along with our mortgage team. Total deposits were flat for the fourth quarter and down $860 million or 2.2% for the year. While we, like many of our peers, have seen a decline in average account balances and a shift towards interest bearing products, our bankers remain focused on preserving and growing core deposit relationships.

We continue to evaluate and tweak our product offerings and our posted rate structure, in an effort to ensure our relationship managers have the tools necessary to compete in this highly competitive environment. The rate environment combined with the balance sheet dynamics that we just discussed, resulted in continued improvement in our net interest margin. Our fourth quarter margin improved 5 basis points linked quarter and our margin for the full year was 3.15% up almost 20 basis points compared to the prior year. Valerie will discuss the margin components in just a few more minutes. Credit quality continues to be a positive story. While we had a — while our — let me start that again. Our fourth quarter provision of $6 million was necessary to support continued loan growth.

We reported net recoveries for both the fourth quarter and the full year. We have now reported net recoveries six out of the previous seven quarters. Our nonperforming assets also declined 8% for the quarter and 38% for the full year and now stand at 24 basis points on total assets at year-end, which is very low by any standard. We will continue to monitor credit quality very closely as we move into 2023. But as of today, we simply aren’t seeing any areas of significant weakness. We continue to improve our operating efficiency. Our fourth quarter adjusted efficiency ratio of 58.7% 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 pleased 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 give it to you.

Valerie Toalson: Thanks, Dan. Dan spoke to the key highlights that are applicable to both our quarterly and annual results that you’ll see on Slide 4. Very consistent loan growth, continued margin expansion, stable credit quality and steady progress in the adjusted metrics. Focusing on the fourth quarter of 2022, the results include quarterly improvement in our net interest revenue due to 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 change in mortgage servicing rights valuation and the bonus provision for credit losses. Fourth quarter adjusted PPNR was $195.5 million, up from $5.7 million from the prior quarter.

Referencing Slides 5 and 6. 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 3.33% for the fourth quarter, up 5 basis points from the linked quarter. Not surprisingly, the pace of improvement in the margins slowed this quarter as our deposit costs accelerated in response to continued rate increases and strong deposit competition. Total cost of deposits increased to 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 of 49% and 39% cycle to date.

Our yield on net loans excluding accretion was 5.41% for the fourth quarter, up 71 basis points from the prior quarter. Our balance sheet remains asset sensitive, with approximately 48% of our loan portfolio or $14.8 billion, repricing in the next 12 months, of which $12.6 billion of that reprices within the next three months. At a higher level, as laid out on Slide 7, 72% of our loan book is floating or has variable rate terms with 28% fixed rate. Non-interest revenue highlighted on Slides 8 and 17, was $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 6.3% 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 BOLI income which is attributable to timing of death benefits. Moving on to expenses, which are highlighted on Slides 9 and 10, total adjusted non-interest expense was $279.3 million for the fourth quarter, a decline 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 rate.

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 non-interest 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 the core system conversion. A 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, the $6 million provision for the quarter supports continued growth in loans and unfunded commitments that we’ve experienced. The ACL coverage finished the year at 1.45% 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 loan 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 ’22 fourth quarter. This expectation is due to the asset mix shift out of lower yielding securities into higher yielding loans, combined with the ongoing asset repricing in our variable loan books.

Slide 7 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 or technology agreements and continued wage pressure.

Importantly, we expect merger and merger-related expenses to be materially behind us, although we are continuing to aim to reach efficiencies beyond our initial targets. Our 2022 net charge-offs, which were actually a small net recovery for the year, were 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’re 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 in the opportunity that lies ahead. Operator, we would like to open the call to questions.

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Q&A Session

Operator: Today’s first question comes from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor: Thanks, good morning.

James Rollins: Hi, good morning, Catherine, appreciate everybody’s patience with our technical problems this morning.

Catherine Mealor: No. All good, all good. Valerie gave a lot of great guidance at the end of your comments. So, thank you for all that. And I wanted to start my questions with maybe on expenses. So it seems like, you’re saying take the $290 million 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 want to make sure, I’m clear on that guidance.

Valerie Toalson: That’s a fully baked-in number, realizing the savings that we’ve got baked-in, as well as the work that’s continuing to be done and the expense headwinds that we, and I believe our peers are also experiencing as we look into 2023.

Catherine Mealor: Okay. And then that $9 million, that was from some of the employee and insurance changes from this quarter, how do we think about that in the run rate for next year? Is that coming, as I was kind of give you as like a one-time event from this quarter? Is that partly in the run rate as we pull that forward to next year?

James Rollins: No. That’s a one-time event.

Valerie Toalson: 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. So that’s not something that happens every quarter.

Catherine Mealor: Great. Okay. Okay. And then maybe — 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 costs flow, but ultimately, by the time we get to the end of next year, we’ll have a higher NIM. Is that a fair way to read that?

Valerie Toalson: I think you’ve got it well. As you said, it’s — the deposits are the bigger key there. But assuming no surprises there, we actually — we could have some modest improvement, where 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 book into the loan book and as we’ve talked about a number of times, the variable rate loans that’s continued to reprice as long as we’re at a higher rate environment.

James Rollins: The way you said I think, Catherine, 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 the upward direction.

Catherine Mealor: Great. Okay. Thank you so much.

Operator: The next question comes from Michael Rose with Raymond James. Please go ahead.