Cadence Bank (CADE) 2023 Q1 法說會逐字稿

Good morning and welcome to the Cadence Bank First Quarter 2023 Conference Call. (Operator Instructions) Please note that this event is being recorded today.

I would now like to turn the conference over to Will Fisackerly, Director of Corporate Finance. Please go ahead, sir.

Good morning and thank you for joining the Cadence Bank First Quarter 2023 Earnings Conference Call. We have our executive management team here with us this morning: Dan Rollins; Chris Bagley, Valerie Toalson; and Hank Holmes. 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, contains our customary disclosures around forward-looking statements and any non-GAAP metrics that may be discussed. The disclosures regarding forward-looking statements contained in those documents apply to our presentation today.

And now I'll turn to Dan for his opening comments.

Good morning, everyone. Thank you for joining us today to discuss Cadence Bank's first quarter 2023 financial results. I will start with a few general comments and highlights, and Valerie will review financials in more detail. Following our prepared remarks, our full executive management team is available for questions.

While it was clearly a very unique quarter for the industry, I believe our customer base and our company's first quarter results generally reflect a business-as-usual operating environment. While we added some additional on-balance sheet liquidity, including borrowings and brokered deposits, simply out of an abundance of caution, customer behavior, including deposit flows, were actually pretty normal during the first quarter.

We reported total deposit growth of $450 million or 4.7% annualized for the quarter. If you exclude the routine seasonal flows of public funds as well as the brokered funds, deposits declined approximately $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 of tremendous value to our franchise. We have an average consumer account size of less than $20,000, while our average commercial account balance is approximately $135,000. Additionally, as of the end of the first quarter, approximately 98% of our total accounts had balances less than $250,000, 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. While the largest portion of our growth this quarter came from our corporate banking team, it 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 are 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 2. However, we continue to have a large unfunded CRE book of existing lines that we'll 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 million or $0.40 per diluted common share and adjusted net income available to common shareholders of $124.4 million or $0.68 per share on an adjusted basis. The primary difference between the 2 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 continue to remain very low, totaling just $1.9 million or 2 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 return to a more normal level from the historically low levels we have reported now for many quarters. We, 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 million. This trade is expected to have an earn-back of around 7.5 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 Paul Murphy's transition this month from Executive Vice Chairman to 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 called by 8 p.m., which exemplified 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 continue to grow as the new Cadence Bank.

Valerie, let me turn it to you for a few minutes on financials.

Thank you, Dan. I wanted to first point out a few -- 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 4, 5 and 6 -- Slides 4, 5 and 6. Dan mentioned 70% of our deposit base being either fully insured or collateralized. The top left graph on Slide 4 shows the components of this calculation.

One of the points of confusion that we saw in some of the early screens that were published on this topic was the lack of adjustment for collateralized public funds, which, in our case, is a fairly meaningful number at approximately $6 billion as of the end of the first quarter. When you take this into account, we compare very favorably with peers with over 70% of our deposits being either insured or collateralized. Further, our contingent funding availability, which is shown in the slides as well, is over 50% greater than our uninsured and uncollateralized deposit total.

Slide 5 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% of our deposit accounts are consumer accounts. Additionally, the nature of our deposits are tenured, with over 70% having been with the bank over 5 years, including over 50% that has been with us for over 10 years. We're very proud of our granular deposit base and the long-standing relationships that exist between all of our customers and bankers.

Regarding our $10.9 billion securities portfolio, it continues to be, as it has been historically, fully categorized as available for sale with any fair value adjustments transparently reflected 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 securities book representing just over 20% of our assets is made up of highly liquid, largely government-backed securities with an effective duration of just over 4 years. Given the nature of the investments, it provides solid cash flows on an ongoing basis, and we anticipate approximately $1.5 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 reported net interest income of $354 million for the first quarter, a decline of $5 million compared to the fourth quarter of 2022. First quarter has 2 fewer days than the fourth quarter, and each day is worth about $4 million in net interest income. So 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 3.29% for the first quarter, down just 4 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 1.28% from 76 basis points in the quarter. As expected, we continue to see migration from noninterest-bearing products to interest-bearing, which is reflected in a 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 in brokered CDs.

Our total deposit beta was 59% for the first quarter and now stands at 25% cycle to date on a cumulative basis. This compares to the first quarter's loan beta, excluding accretion, of 53% and 41% cycle to date. Our yield on net loans, excluding accretion, was 5.87%, 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 by 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 trend pretty stable to potentially upward if our deposit assumptions hold, including a cumulative deposit beta of 30%.

Noninterest revenue highlighted on Slide 15 was $74.1 million, which includes the security loss that Dan mentioned earlier. Excluding this item, noninterest revenue was $125.3 million for the quarter, which is a $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 us from both retention and pricing perspective, which is reflected in the 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 paydowns. Card and merchant fee revenue declined this quarter due both to the seasonality of transaction volumes as well as the impact of a fourth quarter additional $2.5 million benefit related to annual tender 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 and credit-related fees.

Moving on to expenses, which are highlighted on 16 and 17. Total adjusted noninterest expense increased from $279.3 million for the fourth quarter of 2022 to $305.2 million for the first quarter of 2023. If you recall, our fourth quarter conference call, we indicated that the run rate was closer to $290 million when you factored out various year-end accrual adjustments, approximately $7.3 million 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 2 basis point increase in the assessment rate effective in the first quarter. While there are several other puts and takes, the increase in other miscellaneous expense is 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 $1.7 million as a result of higher interest rates impacting the discount rate. SBA expense also increased about $1.6 million on increased volume, which also positively impacted the revenue, as I mentioned earlier. The remainder of the increase were driven by various smaller items, several of which we detail in the slide deck.

Going forward, we expect second quarter adjusted expenses to be below $300 million and closer to the $290 million base level we discussed last quarter and trend downward from there the latter half of the year as the impact of the branch optimization and other efficiencies are realized, partially offset by the third quarter merit cycle. Our longer-term efficiency ratio target remains below 54%.

Regarding the nonroutine 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 our core system conversion.

The largest component of the first quarter total is related to onetime 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 and 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 continue to hold at low levels, totaling just $1.9 million or 2 basis points annualized for the first quarter. As 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 1.45% of loans.

NPAs as a percent of assets ticked up compared to the fourth quarter but is 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 2 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 NPAs are 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. So given our active participation in these markets, that does elevate our nonperforming numbers somewhat.

From a criticized loan perspective, we are seeing some impact in grade migration as we collect year-end financial information and incorporate it into our credit models. We have referenced in past calls that our expectation 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 stable past dues 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 align 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 our 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, 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.

(Operator Instructions) And our first question here will come from Brad Milsaps from Piper Sandler.

Valerie, thanks for all the color around the margin and other details. I was curious if you might be willing to provide sort of 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 the quarter.

Yes. Absolutely, Brad. So at the end of the quarter, I'd say new loans for the month of March were coming in around the 7% level, and that varied a little bit depending on the type of loans, obviously. New CDs, if you back out what was brokered, we're actually renewing at about a 1.5% rate. There have been a number of CDs that were part of the growth this quarter that were actually between 4% and 5% as part of some promotional 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, Chris. You can jump back in here. The production in the fourth quarter came on at an average rate of [6.25%], loan production, and the first quarter came on at an average yield of [704]. Chris?

Nothing to add. That's -- you guys covered it.

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 paydown, some of those advances that you brought at the end of the quarter, how -- is that kind of a bit of mix change that we should see there to kind of keep the margin flat?

Yes. Exactly. I do think that we'll 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, were the loans that you are seeing migrate, are these loans that would have been originated since the merger happened? Or would these be legacy BancorpSouth loans or more legacy Cadence credits or maybe a mix? Just trying to get a sense of kind of the key drivers there.

I think the easy answer is all of the above. But go ahead, Chris.

The vintage is not since the merger. They go back 2 and 3 years, one, the legacy BXS that we lead, one is a legacy CADE that we're a participant in. Color there is there's -- they're not related to each other in any way, different industries, really tied to any kind of trend that we can think of and from a credit perspective.

Our next question will come from Manan Gosalia with Morgan Stanley.

Appreciate all the color on the expense side. I was wondering if you would help us with how we should think about expenses exiting the year given you mentioned that the run rate expenses should be about $290 million next quarter, heading lower from there given the branch cuts and the other actions you're taking. I think you also noted that and you will identify and execute on additional efficiencies. So I was wondering what the exit expenses would look like as we go into the fourth quarter of '23. And then as we think about 24, does that mean that we should expenses actually decline on a year-on-year basis? Or are there output pressures coming through from inflation as we think about '24?

Yes. Let me take a stab at that a little bit, Valerie, and you can jump back in on some of your comments that you made. But I think it's a great question. And we continue -- we're less than 6 months past the consolidation of our 2 banks 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.

Valerie, 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 some of the exit expenses regarding the branch closures. I don't have an estimate for you now. Those are generally not significant. We actually own about 2/3 of the locations and lease 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 as a separate line item in the earnings releases going forward, so that will 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, they dwindle throughout the year. We are expecting closer to between the $300 million and $290 million level for the second quarter and then layering in for the third and fourth quarter the savings from the efficiencies of the branch closures of $15 million to $20 million on an annualized basis. So obviously, getting closer to half a year impact on that for 2023.

Got it. And looks like you're absorbing some of the output pressure from inflation there as well within the number.

Yes. Those numbers include inflation impact that includes merit increases and, of course, the increases that we saw in the first quarter of FDIC assessments and pension costs and so forth.

Got it. All right. Perfect. And then separately, you made the comment earlier on the call that the credit tightening is very apparent in the industry. Can you talk about what you're doing on lending standards? And just generally, how much you think loan growth is going to be impacted from both tighten lending standards as well as weaker demand?

Yes. That's a great question. And we're certainly seeing the demand pull back. You heard the comments that our pipelines are declining a little bit. We do have some tailwinds. So we continue to feel the tailwinds 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 and a slowing demand coming through. We, like I think most of our peers, Hank and Chris can jump in here, are certainly taking tighter looks 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 loans that we'll fund up throughout the year, the current production continues to decline. Guys?

Yes. I think both the bank and our clients are taking a more conservative approach. Interest rates are impacting, the uncertainty around economic forecasts and just slowed down some of the pipelines that we're seeing. So Dan covered the tailwinds we have from a color perspective. Hank, do you have anything to add there?

I'm in full agreement. And I would say the [RMs] that are out there from a deposit perspective, a lot of emphasis there, continue to grow those. But yes, we are seeing an overall kind of wait-and-see attitude within the markets from a loan perspective.

This question was also -- what are we seeing in the way of credit tightening? Are we seeing any experience with other banks? What are we -- are we getting better terms? Are we getting better conditions?

I think in general, there's more equity going into projects that are speculative in nature if they're being done at all, and just maybe more loan agreement covenants tightening there and definitely a requirement for deposits to play.

Yes. The ancillary is definitely in play at this point and very important to the relationship.

And our next question will come from Kevin Fitzsimmons with D.A. Davidson.

Hope everyone is doing well. So as I look out, when we think about the pace of loan growth and deposits going forward, is it more -- is it reasonable to assume those are going to be more -- those are going to be relatively aligned? So if in terms of -- there's an ongoing mix shift within deposits, but to the extent that you're going to go out and pay for higher cost CDs and money markets, you're going to peg that off of loan growth, which is slowing. So I mean 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?

Yes. We would certainly like to be able to grow deposits to hold with loan growth. We've 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 has been 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 are completely loaned up, and so 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 we're certainly asking our team -- Hank mentioned it just a second ago. We're certainly asking our team to lead with deposits on a regular basis. Hank, do you want to add on to that?

Absolutely. I would just say that from a -- over the last 30, 35 years, I think we've had 2 years where deposit wasn't a focus. So the DNA is there, and the understanding of the liability side of the balance sheet from the RMs is a real focus. Obviously, our friends at legacy BXS had a strong granular deposit base, and we're going to continue to build on that as well.

Yes. So when you saw deposits in the quarter, I think you heard that in the comments. The community bank actually grew deposits in the quarter, and we would like to continue to be pushing that out there.

The other thing I would add is that securities portfolio has room to decline a little more. We're comfortable in the 15% to 20% of asset range. And just this year, there's anticipated $1.5 billion of cash flow off in that securities portfolio as well that can also fund loan growth.

Got it. One kind of bigger picture question on just the deterioration or the linked movement we saw in nonperformers. And I know Brad mentioned before that it's coming off of loan numbers. But we also saw a pickup in special mention. So is this just really the pace you all sought for? Or was there any kind of more -- I don't know how to -- maybe call it a more proactive or aggressive scrub given that we're looking ahead to a slowdown in the economy that might have accelerated some of that migration on credit?

I think we have a pretty aggressive process in place all the time. But Chris, talk about where we are today.

Yes. I'd take nonperforming first. So we mentioned the 2 C&I credits that drove that. In addition to that, you see -- you saw the $12 million that I would call government-guaranteed type increase. I think it's important to note 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 come through, I think, as we're just -- we're a big player in the mortgage and SBA loan origination. So I think we'll 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 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 on wage inflation. You take the inflation on interest rates, and that drives some of the (inaudible) debt service coverage, that's what's driving some of those model changes. So where we look forward going forward, we'll continue to pull those numbers in and adjust accordingly.

We're not seeing any general trends. Most of it is in the C&I book. We're 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. It's very granular, very small average loan balance. That's very -- performing very well in our books.

I'll turn it over to Hank. Anything you want to add?

Well said.

Does that help you, Kevin?

And our next question will come from Brett Rabatin with Hovde Group.

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 retail, can you guys -- do you have a number for how much would be retail versus commercial from a dollar basis?

I said in our deck, there's 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 that, too. It breaks out deposits. I got to get to the right page. This is what will tell me. (inaudible)

(inaudible) community 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.

No. There's really commercial in there, too. Yes. So that's talking about where the customer is. So the community bank is the 350-plus branches that we've got out there and all of the cuts that they talk to from smaller businesses to some larger businesses. The corporate group and the corporate deposits are all in the core bank, which is our larger corporate relationships. So you've got delivery channels is how we brought down. So 76% is in the community bank. So that's, again, mostly the rural South, but includes Houston, Dallas, Austin, Atlanta, Tampa, and Nashville, so you're going to have corporate deposits in markets. And you've got corporate deposits in smaller communities. So it's just -- it's more heavily weighted towards the consumer and small business.

So I think (inaudible) if you Slide 6, the mix of the total deposits is about 44% consumer accounts or consumer balances and about 36% commercial balances, if that helps.

Okay. Perfect. And then wanted to ask about the loan growth. Obviously, a lot of the loan growth was Texas and other, which I'm assuming is kind of lines of us, healthcare and the other businesses. Can you talk maybe a bit just about that growth, those pipelines? And then if the lines of business from Cadence classic, if those might be the drivers going forward, if there's opportunities more in those type of silos.

I like that. Cadence classic, I like that. Hank, what's going on in Cadence classic?

Cadence classic, that's a good one. I like that. So as we've indicated that our pipelines have moderated to some degree. We're still seeing activity just not as much as we've seen historically. The CRE book, as has been previously mentioned, has kind of a built-in growth engine in there currently. Obviously, we've been -- we feel like we've been very disciplined in underwriting there and like that portfolio. We'll continue to be active in all the specialty lending groups that we had at Cadence classic, so if I said that right, legacy CADE is going to be focus (inaudible).

Yes. If you look at the growth from the quarter, I think it's about 1/3, 1/3, 1/3 generally from the real estate side, primarily driven by the larger corporate thesis that was multifamily and industrial, the biggest percentage of that. We also had a nice increase in our mortgage book. So the ability to write and held some portfolio mortgages as a win for us, and then the rest of it was maybe a general kind of, call it, general C&I.

The 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 community bank is -- 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 segments. (inaudible) still has some nice opportunities, the renewable piece, so that's looking -- that's worked pretty well for us in the recent months.

Billy Braddock, too. Billy is our Chief Credit Officer on the corporate side. Billy, I know you can cover some of that.

Yes. Sure. That's 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, we're also losing some deals because of those structural enhancements, but we're winning more than our fair share, I'd say. So where we're winning, we're winning a 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 come up yet.

That's great. If I could sneak in one last fee income. Valerie, I didn't (technical difficulty) yet. So the linked quarter 1Q to 2Q '23, obviously, other was up, SBA and some other lines. But typically, insurance is stronger in 2Q. Does it make sense the 2Q fee income is better than 1Q?

Well, insurance is typically the highest in 1Q, Brett, and then will drop off a little bit in 2Q and come back again in 3Q. So the best quarters for insurance for us historically have been 1Q and 3Q. Not that far of a drop-off in 2Q, but not as good as 1Q.

Valerie, I'm sorry, I jumped in on you.

No, that's fine. We would expect card fees to bump up perhaps a little bit in the second quarter. They tend to be seasonally low in the first quarter. So that's an area that could continue. Obviously, our wealth and our brokerage, those businesses continue to really build upon themselves. And so modest growth throughout the year is what we're looking forward there.

And then on the mortgage banking piece, they had really nice originations last quarter and slower paydowns. And so that combined led to some of the improvements in the first quarter. And just kind of depending on what we see, it is coming up into the buying season. We could continue to see nice revenue continue to come off them as well. Although, obviously, with a higher rate environment, I wouldn't expect that to be a material change in the coming quarters.

Now 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 in 1Q is a negative impact on the deposit fees and the card fees a little bit.

And our next question will come from Catherine Mealor with KBW.

I just want to circle back to the margin. Valerie, you mentioned you added $1.6 billion in brokered fees late in the quarter. Can you remind us what the average rate is on the CDs and the maturity?

Yes. Sure. So the average maturity at the end of the year or at the end of the quarter, rather, was about 5 months, so really pretty short. And the average rate was just under 5%.

Okay. Great. So part of your, I guess, 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 and maybe we kind of redeploy some of the cash by lowering borrowings that way?

Yes. Obviously, that's all factored into the margin projection. As far as the $10.5 million of incremental on the securities sales, that's really completely different. The -- that actually had to do more with the reinvestment of those dollars. But yes, on the brokered CDs, as those run off, we anticipate that those will be used likely to either fund additional investments or fund loan growth, and that'll obviously be better used.

Great. Okay. Great. 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 look like over the course of the year?

Yes. I think that -- I mean in the near term, we may run with about $1 billion or so of excess cash. But again, that could vary fairly significantly depending on volatility in the industry. We want to make sure that we have excess cash just to be prepared. And so that could vary. But otherwise, we expect that to come down fairly quickly and be managed at that level.

We wanted to make sure we had 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. And so as I think about stable to up margin and then you kind of get the 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 daily net interest income growth compared to the fourth quarter. With the expectations on loan growth and if we can get the stability in the deposits that we're anticipating throughout the year, then we do believe that we'll be able to continue to grow from a dollar standpoint modestly throughout the year.

Okay. Great. And then maybe just going back over to credit. Valerie, you mentioned that you're seeing some negative migration within classified at quarter end. How do you think that impacts your ACL over time? I mean you've got such a high ACL given during the merger, but we are seeing some negative credit migration. But do you think we have kind of a stable ACL from here? Or is there -- what do you think would actually take that ACL to build from these higher levels?

Yes. I think that to build it meaningfully would require some meaningful charge-offs. There's a lot of variability, obviously, in all of those assumptions, one being significantly the environmental impact. And I think that there's potential for that environmental impact to have a longer-term positive outlook. I don't think that we'll be taking that view in the very near term, but I do think that, that's something that can obviously be offsetting the potential downgrade if those were to occur in the upcoming quarters.

Our next question will come from Jon Arfstrom with RBC Capital Markets.

Just a few follow-ups here. Community bank deposit increases, what do you think the driver of that was? Was it CD-driven, rate-driven? Or was it something else?

Yes, I think the CD certainly play in there because we -- 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, do you want to tag on to that?

Yes. We'd actually instituted and kicked off a deposit emphasis promotion well before the events in the March and the quarter. So some of that was part of a plan and some marketing and some outreach we were already doing. But Dan is right, it's granular. It's across the whole geography, and it's reaching out to existing relationships and new clients. I think there's 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 that.

Okay. You've got some good new slides in your deck. But on Slide 5, you have that 98% number and the 70% number. So 98% of accounts are insured, and then 70% of the dollar amount is 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 outflows of magnitude?

Yes. So let me make sure we're saying that correctly. So 98% have balances less than 2 50. It doesn't necessarily mean that all of that's insured because they could have multiple accounts in the same name. So that's a 98% have less than $250,000 in the account.

What we heard from customers, and we certainly ask our relationship managers and branch folks to be close to customers throughout that process, and they're still doing that today, is that there was a little bit of concern. Certainly, the nonprofits is where we saw some stress points. The large nonprofits were wanting to make sure that they were taken care of. But our customers, again, as I said at the very beginning, were mostly business as usual. They were looking to see kind of what's going on. Certainly, the fear factor played in. The news was talking every day, but we saw pretty normal behavior.

We had some customers and some of the larger customers. So Jon, when you walk back, one of the things we talked about during the quarter was that we were at 67% insured or 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 in the smaller ticket sizes. We certainly saw some reciprocal deposit. Lots of customers are using the insured cash sweep for the ICS product. So we saw some movement in that area. But again, we're mostly in the South. 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.

Good. That's helpful. And then just one more follow-up on credit. How far along are you guys through the cycle of collecting year-end financial information from borrowers? And kind of what's left? I would assume it's smaller borrowers, but I thought I'd ask that.

Yes. On the corporate clients, we're probably almost completely there with -- even with audits for the most part, smaller clients. Typically, that's tax return-driven, take a little bit longer cycle. But most of those are amortizing credits, so you get to monitor those on their payments and their past 2 status. So -- but we've -- that's a focus for us. So we take a look at everything of size, and we're focused on getting that information in so we can properly grade those credits.

Yes. It feels like you're through the bulk of it, though. Is that fair?

That's fair. That is fair. Yes.

I think the 30- to 89-day past dues actually was -- behaved very well in the quarter. So...

Yes, it did. So we're actually -- near term past dues 30 to 90 is were down $4 million. So it's actually flat to down a little bit. So that was a good sign.

Our next question will come from Brandon King with Truist Securities.

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 beyond the 35?

Yes. Great question. I think 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. You go through an elaborate process. So we look at each branch, what the size of the branch is 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 that's the process that you go through and identifying what there. And I think with the team did a great job of identifying branches that we can move out or close in the system without putting a whole lot of deposits at risk.

Okay. And was it (technical difficulty) your other branches? Or was it just more marginal or more some qualitative factors that were part of that decision process?

You cut out on me for a second there. So said that one more time.

(technical difficulty) difference in these branches versus the rest of your footprint? Or was it, yes, pretty marginal based off some metrics?

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, 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. Okay. Well, I'll move on. In regards to capital, is there any increased appetite for share repurchases? I know there weren't any repurchases in the first quarter. But given where your stock is trading at now, is there any increased appetite?

Yes. I would like to be there. But I think as we're flying into potentially darker clouds and potentially unknown in the economy, I think our statement today would be the same as it was last quarter. I think we're going to sit where we are and hold the capital and hold that powder. We 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 that's in the cards anytime soon.

And our next question will come from Matt Olney with Stephens.

Valerie, appreciate all your thoughts on the margin. Can you just clarify your thoughts on deposit beta expectations in 2Q, especially with the full impact of those brokered CDs that came on late in the quarter? You think you can improve on that 59% that you disclosed in the first quarter?

Yes. So that is -- I think the big magic question there is, how much more movement will we have from the noninterest-bearing to the interest-bearing? That's really going to be the driver of I think the biggest (inaudible) of that. And so we saw quite a bit of movement in the first quarter, and there was a much more significant rate movement in the first quarter.

What we're modeling is actually one rate move in May and then stability after that until we get toward the end of the year and potentially coming down. And so if that holds, we are actually modeling that mix shift slows down, and that is what is driving our 30% cumulative beta. We still expect that, that mix shift will continue, but do model out and project that, that will actually slow down again with the assumptions that we have for the rate environment right now.

Okay. That's helpful. And just following up on that, Valerie. Any good evidence or good data points that suggest the NIB mix shift is slowing in recent weeks as you look at the maybe balances since the quarter end?

I think since quarter end, we call it pretty much business as usual. I don't think there's anything of note that we would call out there.

Chris, Dan, your thoughts on that?

Chris?

No. Clearly, 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 -- and the competition is doing the same. Everybody is competing on short terms right now.

Okay. Appreciate the commentary. And Dan, I guess switching over to insurance. I think, Dan, we talked about the insurance segment at Cadence, and we've seen some investing transactions in recent months in the marketplace that have 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 I was a minute ago on revenue. So my brain is not all the way on. The question earlier was on what does insurance look like in 2Q. 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, second quarter is actually higher than first quarter. And I would assume that we will see the same thing.

We saw good organic growth on the insurance team, a little over 10% in 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 work well together. We like 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 in the last quarter. We continue to look for opportunities that we think will benefit our company.

Our next question will come from Brody Preston with UBS.

I do have -- I do want to follow up just on the margin question, Valerie. I think in response to Matt, you gave some good color. But I guess I wanted to put a finer point on the betas. What are you assuming for an interest-bearing beta within that total deposit beta assumption? And what is the noninterest-bearing mix that you're assuming? And lastly, what is your expectation for purchase accounting accretion?

Okay. Sure. First, I'll take the purchase accounting accretion. Expecting $24 million in scheduled accretion for the full year. That includes what we experienced -- the $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 betas, really, what I think I'd focus on is the cumulative beta of the 30%. And the reason we do that is because that incorporates the move from the noninterest-bearing into the interest-bearing and really kind of a gradual increase as we go through the year. Probably, if we get the last rate increase in May as we are projecting, that I would expect that to stabilize out in probably the latter half of the third quarter.

Okay. Understood. And then I wanted to follow up on the expense guidance. You threw out the possibility of maybe getting closer to the $290 level for the second quarter. I think you called out $5 million of seasonal expenses, at least as it relates to salaries and benefits in the first quarter. So I guess if I think more about a nonseasonal number as $300, the step down to $290 is relatively large. It's about a 3.5% decrease. And so what are some of the items that will move lower? And are there any specific actions that you're taking beyond the branch closures that you called out for the third quarter? Are there -- is there anything you've done in the second quarter that should help us see that number come to fruition?

Yes. So there's -- the focus on efficiency has been something that has been key in our minds really since before the system conversion. And then as Dan 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 of continued system tweaks and refinements at our processes as we've merged together that we are rolling out. The timing of some of those things could be earlier, some 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 tend to dwindle down. We'll still have some of that, obviously, in the second quarter, but it will be less impactful as it was in the first quarter.

The fraud expense that we had this quarter was unusual. And certainly, we are hopeful that does not repeat itself into the next quarter. And then there's 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 actually come down as we look out through the year. So we're continuing to work on the efficiencies to build into that. Some of 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.

Yes. And 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. But just like Valerie said, I think we've always been focused on and we'll continue to be focused on more things that we can do. Again, we're less than 6 months past systems conversions. We've got work to do to continue to drive a more efficient operation.

Got it. And then just on the credit front, I did just want to follow up 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 sized C&I credits you have on the book? Or is it smaller than that?

Yes. 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 smacking the middle of the sweet spot. Hank, jump in here.

I think that's exactly right. We've had a history of kind of playing in that range, and it's 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. So I'm beating 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 a 54% number. And it sounds like there's other kind of things that you were viewing to maybe help 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 -- depending on what you did with the excess capital in the sales scenario, but it would be ROA and ROE dilutive given the small asset base and the 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's a right or wrong answer in 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 we're 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 things are going to be better, some things are going to be worse. That's just part of what we do as a company when all the acquisition targets that we look for. So I would tell you that I don't know that we're 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. That doesn't mean that we can't change our mind, but we like what we're doing today.

I go back Brody's question on the NPAs. Yes, the increase were 2 larger credits. But when you look at our total NPAs, the average is $398,000. I couldn't do the math fast enough. So...

So the average NPA is $398,000.

For that C&I book. For that C&I book. So I think it's part of the -- as the 2 companies came together, if you were a legacy BXS (inaudible), we had a much smaller granular average loan balance. If you're legacy Cadence, you'd see bigger numbers. I think that's -- the industrial logic of the company coming together, that's part of the good side of the story. But yes, those 2 that we had this quarter were larger, but there's also a granular component to that C&I book.

(Operator Instructions) Our next question here will come from Michael Rose with Raymond James.

Most have been asked and answered, but I did notice that the AUM of the trust business was up [15%] sequentially. Can you just give some color there? And obviously, the fees were up as well. Just any sort of outlook there would be helpful.

Good to hear from me this morning, Michael. Good to talk. I think most of that is market-driven. So you've seen the market bounce around. The team has done a good job of managing assets. Valerie, you want to add -- jump in on that. We're really proud of what our -- we've got -- remember, we've got our general trust team, and then part of the legacy Cadence was a registered investment adviser. Both sides of that business have done very well for us in the first quarter. Valerie?

Yes. No, I agree with what Dan said. The other thing I'd add is that there is a component of that, that is a little bit cyclical in the custodial AUM piece that tends to be a little higher at the end of the first quarter. And so some of that is factored in, some of the market impact and then some net inflows from customers. Just like many customers saw or many (inaudible) flow out of their deposits into some of their investment funds, we saw a little bit of that as well, and that helped (inaudible) 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. Appreciate the color. Maybe just kind of one final one for me. I think we've gone 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, you had a little bit more capacity than maybe some other banks out there. But any sort of venture as to what the loan -- the cumulative loan beta expectation could be?

I won't speak to the beta. I'll let Valerie do that because she's got the calculator in front of her. One of the things we've talked about and haven't come up yet this morning, we've talked about it now for multiple quarters going back is higher for longer is a benefit for us, the way the balance sheet is set up. And so we continue to believe that that's the case for us. Valerie, you want to talk specifically about the beta?

Yes. So we've been fairly consistent in the past couple of quarters as you've seen on the quarterly beta. 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 also repricing. And so it wouldn't -- we expect that it'll actually maintain some similarity there as long as there are rate increases. And then even after the 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's good amount of 43%, but actually reprices in the next 13 -- or I'm sorry, 3 months, $13 billion that reprices in the next 3 months that'll obviously help support that specifically over the near term.

And that concludes our question-and-answer session. I'd like to turn the conference back over to Dan Rollins for any closing remarks.

All right. Thank you, everyone, again for your questions and participation today. 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.