Cadence Bank (CADE) 2023 Q2 法說會逐字稿

Good day, and welcome to the Cadence Bank Second Quarter 2023 Webcast and Conference Call. (Operator Instructions) Please note this event is being recorded.

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

Good morning, and thank you for joining the Cadence Bank Second Quarter 2023 Earnings Conference Call. We have members from our executive management team here with us this morning, Dan Rollins, Chris Bagley, Valerie Toalson, Hank Holmes and Billy Braddock.

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 for his opening comments.

Good morning, everyone. Thanks for joining us today to discuss Cadence Bank's second quarter 2023 financial results. I will provide a few highlights, then Valerie will review our financials in more detail. Following our prepared remarks, our executive management team will be available for questions.

We reported quarterly net income available to common shareholders of $111.7 million or $0.61 per diluted share. The adjusted net income available to common shareholders was $116.9 million or $0.64 per diluted common share with the primary difference being nonroutine expenses associated with our ongoing initiatives to improve efficiency, which I will discuss more in just a second.

We had another strong quarter from a loan growth standpoint with net organic growth of $1.3 billion or 16.3% annualized. Year-to-date growth is now $2.2 billion or 14.7% annualized. Growth for the quarter was well distributed from a product and geographic perspective.

Mortgage production was robust, supported by second quarter seasonality. Additionally, we saw continued fundings from CRE commitments during the quarter. We will continue to fund commitments in the coming quarters, but overall, we expect the pace of loan growth to slow to an annualized mid-single-digit growth rate for the second half of the year.

Total deposits declined just over $700 million in the quarter and have declined approximately $250 million year-to-date or 1.3% annualized. Our community bank deposit base continues to hold up very well, with most of the pressure coming from corporate accounts. Some of the corporate declines are typical second quarter seasonality.

However, this year, some of it is also driven by commercial customers seeking yield. Community bank deposit outflows were $130 million in the quarter, while year-to-date growth for the Community Bank now stands at $347 million. Like many others, we felt the industry-wide pressure on funding costs at a faster pace this quarter and saw the impact on our margin accordingly. Valerie will discuss this as well as our revised expectations and her margin comments in a moment.

As we look at a couple of our other highlights. Our results reflect strong performance from our fee income businesses, including record quarterly insurance commission revenue of nearly $46 million. We reported a meaningful increase in P&C commissions driven by business growth and retention as well as upward pressure on policy pricing. Finally, we continue to work aggressively towards improving our operating efficiency.

We reported a decline of approximately $8 million or 2.6% in linked quarter total adjusted noninterest expense. We also refined our savings estimates related to the efficiency initiatives that we discussed in our first quarter call, including 35 branches that we expect to close within the next 30 days, as well as various ongoing initiatives, including early retirements and other personnel savings. These initiatives are now projected to produce noninterest expense -- reduced noninterest expense by approximately $35 million to $40 million annually. The majority of these actions associated with these initiatives will be implemented during the third quarter, and we expect to reflect the full benefit by the first quarter of 2024.

Valerie, I'll turn the call over to you.

All right. Thank you, Dan. Looking at the results for the quarter, we see 4 broad themes, including key business development successes, stable credit quality, acceleration and funding costs and progress toward improved operating efficiency. Breaking down net interest revenue and margin on Slide 11. We reported net interest income of $334 million for the second quarter, a decline of approximately $21 million compared to the first quarter of 2023.

Of the decline, $5 million is related to lower accretion income compared to the first quarter with the remainder being driven by accelerated funding costs. Our net interest margin was 3.03% for the second quarter, down 26 basis points from the linked quarter or 21 basis points, excluding the decline in accretion. Our total cost of deposits increased to 1.87%, up 59 basis points from last quarter.

As you may recall, we added $1.9 billion in brokered deposits in March of this year and maintain those balances in the second quarter. Factoring out broker deposits, our core customer cost of deposits increased 45 basis points in the second quarter as we continue to see migration from noninterest-bearing products to interest-bearing.

The percentage of noninterest-bearing to total deposits declined from 29.2% at the end of the first quarter to 26.4% at the end of the second quarter. Our yield on net loans, excluding accretion, was 6.18% for the second quarter, up 31 basis points from the prior quarter. And at June 30, our total deposit beta was 35% cycle to date, while our loan beta excluding accretion, was 44% cycle to date.

Looking to the second half of the year, we currently anticipate our not -- our net interest income and our net interest margin to stabilize supported by continued loan growth and a slowing of both deposit outflows and the mix shift from noninterest-bearing to interest-bearing.

Additionally, we are forecasting a gradual increase in a cumulative deposit beta to around the 40% level by the end of the year with a cumulative loan beta excluding accretion, increasing to the 50% level.

Noninterest revenue highlighted on Slide 14, with $132.3 million. Excluding the securities losses, noninterest revenue increased approximately $7 million or 5.5% compared to the first quarter. Insurance commission revenue increased $6 million or 15% linked quarter. And impressively, insurance revenue has grown 14% compared to the second quarter of last year.

Mortgage banking revenue was relatively flat linked quarter with a decline in production and servicing revenue, offset by improvement in the MSR asset valuation. The decline in other noninterest revenue was largely due to the result of timing of elevated FBA and credit fees related to activity in the first quarter that we had earlier this year.

Moving on to expenses, which are highlighted on Slides 15 and 16. Total adjusted noninterest expense declined $8 million from $305 million for the first quarter of '23 to $297 million for the second quarter. The largest linked quarter decline on an adjusted basis was $4.8 million in salaries and employee benefits, largely attributable to seasonally higher payroll tax and retirement plan expenses in the first quarter of each year.

Data processing and software expenses declined $3.9 million on a linked quarter basis, including the result of savings associated with vendor contracts and service agreements.

Finally, other miscellaneous expenses declined $3.6 million compared to the first quarter, including lower levels of fraud losses as well as several other smaller items through various miscellaneous expense categories.

As we look forward, Dan mentioned that we have updated the cost savings estimates associated with our strategic efficiency initiatives to $35 million to $40 million annually. The 35 branch closings will occur during the early part of the third quarter and the early retirements and other personnel savings will be phased in over the course of the rest of 2023. We incurred nonroutine costs of $6.2 million in the second quarter associated with these initiatives, and we anticipate incurring an additional $10 million to $12 million over the remainder of the year.

Factoring in these initiatives as well as our annual merit cycle increases that were effective on July 1, we expect our quarterly adjusted non expenses to decline in each of the third and fourth quarters.

Finally, speaking to credit quality on Slide 9. Our provision for the quarter was $15 million, up slightly from the $10 million provision in the first quarter of this year, primarily as a result of the loan growth we saw in the quarter. The $15 million was made up of a $25 million provision for funded loans, partially offset by a $10 million provision reversal on unfunded commitments. This dynamic is attributable to the continued funding of lines as well as the slowing of new unfunded originations.

Net charge-offs increased to $12.7 million in the second quarter or 16 basis points as a percent of average loans on an annualized basis. The net charge-offs were largely the result of a C&I credit that was identified as impaired and reserved for in a previous quarter.

In addition, nonperforming loans and nonperforming assets improved slightly compared to the first quarter, declining $4 million and $6 million, respectively. We also continue to be comfortable with our classified and criticized asset levels as a percent of total loans at 1.9% and 2.7%, respectively. We are pleased with the overall stability of our credit quality. And while there are always a handful of issues being worked on, we've not seen indication of specific concentration or segment concerns.

In summary, our results reflect a number of positive this quarter, and there is a lot of momentum as we look forward. We expect stabilization in our net interest margin. [CRC] businesses continuing to perform well and we are executing on various fronts to improve our operating efficiency. We also continue to have solid liquidity, credit and capital metrics providing a strong foundation for our ongoing business growth.

Operator, we would now like to open the call to questions.

(Operator Instructions) Our first question comes from Catherine Mealor with KBW.

I want to start on the margin. And Valerie, I found your commentary on your -- the updated beta is interesting, especially the loan beta that you're pointing to a 50% cumulative beta as we end the year. And just curious, as you think about the loan repricing that you see in the back half of the year, I mean, we saw a pickup in loan betas this quarter.

And so as you see deposit costs and maybe the mix shift stabilized. I mean you're pointing to a stabilizing margin, but is it possible to even see the margins starting to increase? Maybe next quarter's too soon, but as we're exiting '23 and into '24, just given your outlook for how you see loan yields repricing?

Thanks, Catherine. Great questions. First of all, I will say that what we are anticipating is one rate increase in the third quarter and then no more for the rest of 2024, excuse me, for the rest of 2023 and then nothing really until the middle part of 2024. So that's really the foundation for these assumptions.

To your question, yes, we've included the slide again in our slide deck that shows the loan pricing characteristics. And yes, those loans continue to reprice the loan growth that we've got, all of that is fueling that loan yield to continue upward.

That being said, it's all about the deposits. So could it improve as we go toward the end of the year? Absolutely, if deposits behave properly.

Behave properly. Deposits behave.

I think what we saw in the second quarter was a bit unusual for the whole industry. If we were to see another quarter like that, then that certainly wouldn't be the dynamic. What we're -- what we are looking at based on some of the recent trends the slowing, like I said, of some of the migration out of noninterest-bearing, still expecting some continued migration, don't let me misstate that there, as well as some continued deposit runoff, but again, a somewhat slowing of those trends, and that's what's built into that stabilization comment.

We continue to believe higher for longer is better. Higher for longer can be better for us.

Okay. Great. And then in that -- on the noninterest-bearing remix, what's your -- I mean, I know we just have no idea, but what's your best guess on where you think that bottoms as you just look at your business mix and some of the trends you're seeing throughout the back, maybe especially in the back half of the quarter as that stabilizes?

Yes. So what we are actually modeling right now and projecting is by the end of the year being down to the 23%, 24% level compared to the 26% level right now as a percent of total deposits. Depending on, again, kind of what happens in the back half of the year, we could see that possibly going even a little bit lower into the early part of '24, but that's probably a little too early to call at this point.

Got it. Okay. But if we blend together Cadence and legacy BancorpSouth back in 2016, you were at about, I think, about 26%. So just a little bit below maybe pre-COVID levels on a combined basis, it feels like, but not drastically lower?

That's based on some of the monthly trends and some of the recent activity and behavior that we're seeing that causes us to model it in that direction. Yes, that's exactly right.

Okay, great. And then can you just give us a flavor for where new deposits are coming on today, maybe in new different products, CDs and money markets?

Yes. Most of the new deposits are coming in on the CD on the high end. We're seeing a little bit of win on noninterest-bearing and some customer wins that we've picked up in a couple of places, but most of the dollars are flowing in on the interest-bearing high-end products.

I'll just add to that. I might just add a little color to that. I mean we are actively seeking the corporate deposits, we had indicated that there was some decline there. We were seeing some nice wins and some seasonality in that, that our legacy CADE folks had seen in the first couple of quarters and I feel very good about where the pipelines are on the corporate side going forward.

And I would just say from the CD promotional rates, those are, to your point, Catherine, 5% to 5.25% is the pricing that we're seeing right now. Many markets are probably in the 3.5% level.

Next question comes from Michael Rose with Raymond James.

Just a follow-up question on deposits. I know the brokered deposits were down a little bit linked quarter. What are the kind of expectations for those balances as we move through the year? I'm just trying to get a sense for how much matures and what's kind of taken on in that short-term nature and the depth of the failures in that in March?

Yes, sure. So yes, it did come down a little bit. We did -- most of those are fairly short-term 3-, 6-, 9-month type of brokered CDs and broker deposit arrangements. We do anticipate at this point, really probably maintaining that level, at least in the foreseeable future. Just with the deposit outflows in the industry, it's probably likely that we'll maintain those for a little bit longer than obviously we would have in the past.

And then just pick on Catherine's question in the guidance, it sounds like maybe a little bit more pressure on the NIM in the third quarter and maybe a little bit more pressure on NII, but that should kind of stabilize to rebound in the fourth quarter and then you have a pretty big gap between the loan beta and deposit beta expectations even though deposit betas rose from your prior expectations. Is that kind of just broadly speaking, the way to read it, Valerie?

I think as we look through the rest of the year, we think there's opportunity to stabilize the margin really throughout the last half of the year and not just in the tailwind of it.

It's back to deposits behaving appropriately.

Well, I did hear those sirens in the back, Dan, earlier, so maybe you guys got the cops after those depositors.

That's right. That's right.

That's -- just switching gears a little bit. Just wanted to kind of square the circle on the incremental cost savings from some of the expense initiatives. I think you mentioned that you'd expect deposits down kind of third and then into fourth quarter as a result of that.

You've kind of previously given a range of $290 million to $300 million, but you have these extra cost savings. Obviously, you're doing some investing in the franchise as well. Is that still kind of a good range? Or would you potentially dip below kind of the $290 million as we get into the fourth quarter?

Yes, you've got a couple of things going on in this quarter in 3Q. Number one being the impact of annual salary changes, we do that effective July 1. So that's an add to the third quarter run rate there. But we also see the savings that are coming in. So I think the $35 million to $40 million that we're going to harvest out in the back half of this year, you'll see all of that in the first quarter. So that's a $10 million a year -- $10 million quarter drop off of the numbers that you see today, you're back into the investing. So you've got the upside. The only significant up that I'm aware of today would be the salary changes in 3Q. Valerie, you....

Yes. No, that's exactly right. And then on a GAAP basis, some of the onetime costs, but we'll identify those clearly. Yes.

Our next question comes from Manan Gosalia with Morgan Stanley.

I was looking to get some more color on just the level of conviction that NIM and NII should stabilize from here. Can you talk about the rate of change that you saw during the quarter? I think you just made a comment that part of your guide was based on the more recent flows that you're seeing. And many of your peers have also noted that June was better than April and May. So I was wondering if that was something you saw as well?

That's exactly right. April was the worst month of the quarter, and we got better in May and June, and that's why you're seeing us model and have some confidence that we're stable.

And what do you think drove that? Was it just improving customer behavior? Was it better management of liquidity? Or was it just more conviction that the environment is improving so you were able to price your deposits appropriately and manage liquidity more appropriately?

I think the customer behavior in April was all a result of the March madness in the banking industry, and that's what we were dealing with in April and things have calmed down since then.

Got it. (inaudible) just seen.

Yes, go ahead. (inaudible) outflows in the pricing as we've gone through the quarter.

Got it. All right. Perfect. In terms of just cash and level of liquidity. I think last quarter, you had said $1 billion or so of cash is a level that you're comfortable with. I think you're around there with about $1.7 billion right now. So can you help us think through what the appropriate level of liquidity is? And also maybe the rationale behind $1.2 billion of BTFP borrowings from this quarter.

Sure. Yes. So we brought down our cash levels about $3.5 billion -- about $3.5 billion this quarter, and that was really because of the excess cash that we put on at the end of the first quarter. And just like the stability that we mentioned on the deposit front. Just really didn't see the need to maintain that excess liquidity.

On the levels that we have right now, it's still probably a little higher than what I would say, as a historical norm. And so over time, that may dwindle down maybe another $0.5 billion or so.

We're comfortable today.

Yes, to a more normalized level, but we're comfortable where we are today. And then, yes, you're right. We actually did replace some Federal Home Loan Bank borrowings with a bank term funding program borrowing, about $3.5 billion there at a rate that was lower than the Federal Home Loan Bank borrowing, and we can pay it back at any point in time. So it was a net improvement for us on the margin and on our expense costs.

Got it. So you just substituted part of the FHLB with BTFP?

That's exactly right and saved a little money to boot.

Our next question comes from Brandon King with Truist.

So I wanted to touch on loan growth. Obviously, it's slow in the back half of the year, but could you give us some more context behind what's driving slower loan growth and with the stronger seasonality of resi, are we expecting resi to be a contributor in the back half of the year as well?

Say that last part again, the strong...

Because resi was a strong contributor in the quarter.

Resi. Yes, yes, yes. The second quarter residential will drop back. Remember, the third quarter will drop back from second quarter. We expect to see that to drop. And the secondary market is improving a little bit there. So the stabilization of rates is helping in the secondary market. So that's what you're seeing.

On our side, we're -- what's coming on the balance sheet is ARM product. ARM product. Hopefully, we'll be able to be moved into the secondary market more and more as the market picks up. From a slowing back half of the year, I think the industry [as a whole] and ourselves are saying much less coming through the pipeline. But lots of people are in the room here, Hank and Chris and Billy.

I think you're exactly right. We've seen really a credit tightening within the industry. A real focus on making sure that we have clients that we benefit from both sides of the balance sheet. We're taking care of our clients. But at the same time, we are very keenly focused on the deposit generation and what that looks like the second half of the year. But I think in general, you're just seeing an overall credit tightening within the industry.

And I'd say as part of that, there's a little bit of tightening on the spreads that comes as part of that. And so by being able to be a little more selective, it allows us to do a little bit better on pricing.

Got it. And what -- just a follow-up on that. Since the industry is tightening in general, are there any -- is there any appetite to kind of take market share with higher credit spreads and kind of being more opportunistic in this sort of environment?

We've told our team absolutely to be out talking to the customers that you've been wanting to bank for a long time. Where there's an opportunity to move over a customer that we've been wanting for a long time, we're absolutely open for business and have some successes in doing that, but we're being selective.

[One thing] on the customers that have deposits as well is a key component to the lending that we're doing today.

We need a full relationship.

Absolutely.

And just lastly for me, just given how the trends were better in the latter part of the quarter. How close was the June NIM to the average quarter NIM?

We're probably not going to give any specifics on this. But our NIM was -- like I said, April was the biggest deposit cost change that we saw on a percent basis, and then that trended down throughout the rest of the quarter. And that's what gives us some of the projection basis that we have going forward.

Our next question comes from Brody Preston with UBS.

Valerie, I wanted to follow up on the loan beta commentary. I was hoping maybe on the 3- to 12-month bucket that you guys give in the deck, you got about $2 billion of loans that are repricing within the next 3 to 12 months, they have a 576 loan yield. I guess where does the loan yield go when those reprice in the current market?

So what we saw in the past quarter was renewed loans coming in somewhere in a 8.25%-ish range, give or take a few basis points depending on the type. And so that's a meaningful bump from what we see on there. Now that's going to have mix depending on what the product is, loans that are mortgages, obviously, are lower than that. But that's what we saw in the new renewed loans that came on in the second quarter.

Okay. So that would be like a 250 basis point pickup or so on 4% to 6% of the book by year-end. I guess I'm just trying -- the 50% cumulative beta step up with only one more rate hike seems to indicate some significant repricing for the book. I guess, maybe beyond the -- what's in the 3- to 12-month bucket. So I was just trying to square those comments?

Yes. It's higher for longer continues to allow us to reprice assets forward that have not repriced yet.

Yes. And combined with the loan growth that we've been able to see, even though slowing, that will still be a contributor to this beta as well.

Okay. And then on the noninterest-bearing commentary, that I think April was the worst, May and June both improved -- when you say improvement, do you mean the rate of change improved? Did you mean the dollars actually grew just because the average in the period-end declines aren't too dissimilar. They're both 11% to 12%. And so I was just trying to make sure I understood was that June was just down less than April was?

From the rate of change, yes, it was down less than April was...

Yes, you said that right. Rate of change improvement.

Yes.

Got it. And within the margin commentary, how much -- I guess, is there any dependence on I think you said the $1.8 billion of brokerage is going to maybe stick around, but that $1.2 billion of [BTFP that you had on] average. I guess, how much -- is there any expectation for that to move lower within that margin commentary?

Really, that's going to depend on the rest of the balance sheet. We locked that in at rates in the second quarter that are going to be favorable as we go forward. We can maintain that for a little while. And so just really kind of depending on where the rest of our balance sheet goes, we'll use that as a variable factor to potentially bring it down to...

[Bridge rates.] Quarterly average balance on that, then I'd be looking at a quarter end on that.

Yes, quarter end was $3.5 billion and just over a 5% rate.

Okay. So that full -- I guess, the full $3.5 billion that I see at quarter end, is that all BTFP?

Yes. That's right.

Yes.

Okay. Okay. All right. And then I did just want to follow up with just 2 last questions. Just on the July 1, the (inaudible) base increases that you referenced. Can you give us a sense for what the -- I guess, what the dollar size amounts of that is, just so we can make sure we're modeling the quarterly variations given all the moving parts from the cost savings and that?

Yes, it's $3.5 million to $4 million per quarter.

Okay. And then the last one was, I was just trying to understand the nuances in the criticizing classified. I think the accounting change shifted a decent amount on the residential mortgages from substandard back to pass [maybe, but the] Commercial criticized classifieds went up by 17%. So I guess in my understanding the accounting change correctly, -- and then was there anything specific that drove the step-up in the commercial criticized classified?

I'll take a stab. This is Chris. The step-up in the commercials, grade migration as we work through credits normal customary kind of grade migration. The change in the methodology was to adopt the regulatory guidance around the mortgage credits from a substandard and special mention perspective. So that's what moves those numbers. So most of that -- those dollars went from sub to special mention in the resi bucket.

Next question comes from Jon Arfstrom with RBC Capital Markets.

Can you help us understand what's going on in insurance? I know you mentioned it seems like it's a little bit of a hard market, a little bit of new client acquisition, but up 14% year-over-year. I'm just looking for a little more color on that and what the outlook could be?

The team has done a great job. As we've said before, we like that business. The team is doing a great job of growing our book of business and retaining customers. So -- our retention was really good in the quarter. Our new business was good in the quarter, and you add on that a hard insurance market where just like my home premium and my cars that went up in the quarter, everybody is paying more for insurance.

A bit anecdotal, but I think just we're starting to develop synergies with the commercial teams and the corporate bank, too. So there's just a lot of energy in that space as we work together.

Okay, and outlook for that? I mean, it seems -- because to me, that would be the driver, right? The new business, not necessarily the hard market.

Yes. The team is doing a great job. We continue to see ability to grow that revenue stream. And so the team is doing a great job of growing that. We've added some producers to the team here in the last couple of quarters. They're beginning to hit their stride. We've added some market to the team, there's activity going on there that will help us grow that business.

Okay. Just a follow-up credit question. I don't know if it's for maybe Billy or Chris, but how do you guys want us to -- or Valerie. How do you want us to think about the provision? I mean things do look pretty clean from a credit quality point of view, but curious how you want us to think about the provision and if there's anything else out there on credit that you're watching more closely?

I think you're right. I think we feel pretty good about credit. But you guys talk about provision. Somebody?

Yes, I'll kick it off. So obviously, we have a model. We follow our process. Valerie's comments were on point. We're not seeing systemic large impact on any vertical or line of business or collateral segment. It's still kind of a one-off problem credits that we're working through. So from that perspective, we're not seeing any large moves from a credit perspective. Billy? Valerie?

Yes. I mean I don't know what else to say other than -- I mean, Jon, you followed us for a long time. We will see. We regularly review all of our credits. Anything that gets impaired, we are early to impair -- some of those could get worse. Some of those could get better. But the ones that get worse from a corporate standpoint are going to be kind of lumpy, and we've talked about that in the past. We had one of those this last quarter. That's what drove most of the charge-offs. Some of that can continue, but I don't see anything systemic. I guess, is a better way to answer that.

Does that help you?

Our next question comes from Matt Olney with Stephens.

Just wanted to clarify some of the commentary on the cost savings in terms of what's incremental from what we discussed on the April call. I mean I guess the number of branch closures are the same, but the early retirement, and I think it was termed other target efficiencies that sounds incremental. Any more commentary for us to appreciate kind of what's incremental on the cost savings plan since the April call?

Yes. It's people. So the voluntary retirement program that we offered out is still ongoing. And so we're working through all of that. But we expect to see headcount reduction, and we expect to see some restructuring in some of the teams that we're doing to be more efficient and that will -- almost all of that is going to result in payroll cost reduction.

Okay. Appreciate that. And then, I guess, thinking more about capital, I mean we're seeing there your TCE ratio increased a little bit in 2Q. I'm sure it's not where you want to see it. But just remind us how we think about -- or how you think about capital and as capital builds the back half of the year into next year? And what capital level is there -- what are you targeting? What we could talk more about deployment opportunities?

Yes. Again, I don't know that in today's environment, we have a specific target. I think you're coming around to the buyback program. I think we continue to have our buyback program in place. I don't think we'll execute on our buyback program in today's environment. And at today's levels, we're growing capital, and we've got great earnings coming through the pipeline, but we need to make sure that we're prepared for whatever comes our way from an economic standpoint.

Okay. And going back to the loan growth commentary. You mentioned a significant part of the growth in 2Q was from residential mortgage and some of those ARMs and you thought maybe you could potentially sell some of the back half of the year on your newer production if pricing improves. Are you seeing that yet in the back half of the year? Are you seeing an improved pricing? Or is that something you're just still waiting for?

Yes. No. I think we've seen what's in the pipeline has moved more to secondary market product from on-balance sheet products. So I think we feel like that will slow in the third quarter just from what's in the pipeline that hasn't closed yet now.

Okay. And just to clarify, the commentary about loan growth slowing in the back half of the year, given your mid-single-digit guidance, how much of that is just selling more of the mortgage production versus a slowdown of just more on the commercial side?

Yes. So let's make sure we're all saying the same thing. So we would continue to think that mortgage can grow through the back half of the year at a slower pace. So what we've seen over the last year is more of our mortgage production has come on balance sheet than has historically been the case for us.

We were a 70% -- 65%, 70-plus percent secondary market production shop, where we were selling things off in the secondary market. when rates started spiking up, the ARM product became very popular. The secondary market for ARM was dysfunctional. It still kind of is, but it's improving. And so now even though ARM is still popular, we're producing more ARM product that is secondary market going out. So the things we're closing now, more of that is going out into the secondary market than it was before.

And that was an increasing trend as we went through the second quarter. And to Dan's point, that we'll likely see a little bit more in the third quarter. But that's not what's driving...

The slowness. (inaudible)

(inaudible) of the slowness and that will be a part of it, obviously, but...

That's where was I going, exactly.

But not (inaudible).

So the whole pipeline has just slowed down. What we're seeing coming through the pipeline from first quarter to second quarter is different and what's in the pipeline today is different.

Our next question comes from Brett Rabatin with Hovde Group.

I wanted to first see if you had the number for the unfunded commitment change linked quarter. I know you had a negative $10 million provision related to that.

I don't have that number specifically other than it's down the other way. I mean I don't -- anybody has that? I don't -- we can get back to you on it.

Yes, the -- there was a whole lot of unfunded construction loans coming into the year, and those loans are beginning to fund up and have been funding up throughout the first 2 quarters as a construction project finishes, it moves into CRE and out of the CAD bucket -- it's also pulling off of the unfunded.

Okay. And then I wanted to make sure I understood you have a really strong consumer deposit base. And I just want to make sure I understood the comment around the decline primarily in corporate accounts activity. Could you guys talk a little bit more about what you saw on the corporate side and just what that change meant for their -- the cost of funds, specifically on the corporate side.

Yes. So what you heard me say was we track ourselves off of our community bank team and our corporate bank team. The community bank team, as I said, has done fairly well. Deposits are actually up year-to-date in the community bank. The corporate world, those treasurers are looking for yield. And so we're seeing more and more people look for dollars. Hank, do you want to talk about that?

Yes. So there are a couple of dynamics that happened in the first part of the year. First of all, if you get taxes, obviously, you also get bonuses that get paid. And we have seen that over the last 10 years come down, the corporate world there's some seasonality to it. There's also -- as rates have risen, the difference between paying 1% for deposit versus paying 4% to 5% is really eye opening from the CFO perspective.

And so we're getting a lot more push to move those out of the DDA and into the interest-bearing accounts. And in addition, as we saw in March with some of the issues there, some of our clients also sought some secure positions seeking FDIC insurance or money market mutual funds that allowed us to move some -- that moved some deposits out to reduce some of those larger depositors. We've seen some of that come back and some stabilization there. And I am hopeful and what we've seen historically see some of those corporate deposits rise in the second half of the year to offset some of that decline.

Okay. And then just last quick one for me. I know the AOCI improved a little bit linked quarter, and you guys sounded like you haven't been interested in doing any more restructuring of the securities portfolio. I was just curious if that mindset has changed at all? And if you thought maybe that might be a use of capital here at some point in the back half?

I think it all depends on where rates go and what's happening. I mean, I don't see us doing that today, but there's been stranger things that happen in the environment.

We always try to take a look at the portfolio, at changing interest rates and do what's the best for the balance sheet.

And the team does a great job on tracking that and monitoring that for us.

Yes, they sure do.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

All right. Thank you all again for your time for joining us today. I just want to repeat the 4 broad themes for the quarter that Valerie mentioned a few minutes ago, including key business development successes, stable credit quality, acceleration in funding costs and progress toward improved operating efficiency.

In closing, I'm excited about the future of Cadence Bank. I believe we are navigating this part of the cycle from a position of strength. As evidenced by our quarter's results, our balance sheet is in a great position from a liquidity standpoint. We will continue to focus on expanding our core deposit base, maintaining strong credit quality, growing our fee businesses and taking advantage of the opportunities in front of us to improve operating efficiency. Thanks again for joining us today. We look forward to visiting with you soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.