CADE (2025 - Q1)

Good day, and welcome to the Cadence Bank First Quarter 2025 Webcast and Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Will Fisackerly, Executive Vice President and Director of Corporate Finance. Please go ahead. Will Fis

Good morning, and thank you for joining the Cadence Bank First Quarter 2025 Earnings Conference Call. We have members from our executive management team here with us this morning, Dan Rollins; Chris Bagley, Valerie Toalson; 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 eastern or you can view them to 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. The disclosures regarding forward-looking statements contained in those documents upon to our presentation today. And now I'll turn it to Dan for his opening comments.

Good morning. Thank you all for joining us to discuss our first quarter results. After I cover a few highlights, and Valerie provides additional detail on our financials, our executive management team will be available for questions. First, during the quarter, we received all regulatory approvals to complete our acquisition of First Channel Bank, and we plan to close May 1. As a reminder, we announced this transaction the last time we had an earnings call, so to be able to get approval and close in under 100 days is fantastic. We're looking forward to working with Ken Farrell and his team at First Channel and expanding our presence in Georgia. Regarding the first quarter results, our financials continue to exhibit strength in a number of areas. GAAP net income increased to $130.9 million or $0.70 per share, adjusted net income from continuing operations increased to $131.4 million or $0.71 per share and ROA was higher at 1.15%. Our balance sheet management last fall drove an increase in net interest margin of 8 basis points this quarter, and our adjusted efficiency ratio improved by over 100 basis points as managed expenses offset the impact of fewer days in the quarter on revenue. Our teams remain focused on supporting our customers, which resulted in first quarter loan growth of nearly 4% on an annualized basis, with the strongest growth coming out of Georgia, Florida and Texas, as those states continue to do well against the national backdrop. Loan pipelines remain solid across most of our regional markets. Merchant commercial real estate activity is as robust as it's been in years. Competition for the best transactions has driven yields down somewhat in recent months, but activity remains high. Deposit balances grew nicely on average, but given typical first quarter volatility, we ended the quarter flat with core customer deposits maintaining stability both in balances and in the mix of noninterest-bearing deposits. Importantly, credit results have been stable overall and were in line with our expectations for the quarter with net charge-offs of 27 basis points annualized. There has certainly been some disruption added to the economy as of late. And while we are alert to the possibility of issues with borrowers, we have not seen any impact yet. Our tangible book value continued to expand, increasing to $22.30 per share, and regulatory capital levels remained very strong with CET1 growing to 12.4%, allowing us the capital flexibility to be opportunistic as we look ahead. I'll turn the call over to Valerie for her highlights on the financials and a few more details. Valerie?

Thank you, Dan. To add to Dan's comments, our pretax pre-provision net revenue for the first quarter increased to $190 million, up over 3% from the prior quarter, driven by solid loan growth and lower expenses. Average loans were up just over $482 million in the quarter, while period ending loans grew by $310 million or 3.7% annualized as paydowns in the construction and energy portfolios impacted the period-end balances. The growth primarily resulted from strong performance in our mortgage, private banking and community bank groups, and as Dan noted, more heavily weighted in our higher-growth markets. The quarter's loan growth was right in line also with our expectations of low to mid-single-digit growth for the year. Average deposits increased $610 million in the quarter, while period-end deposits were essentially flat with a slight decline in brokered deposits, mostly offset by a pickup in public funds. Our deposit mix at quarter end was stable with our noninterest-bearing deposits as a percent of total deposits coming in just over 21%, the same level as they were at year-end. We also had $1.8 billion in CDs mature in the quarter, and our teams did a great job of retaining as CD balances also remained stable in the quarter. Referencing Slides 9 through 11, our first quarter net interest margin of 3.46% continued to improve, up 8 basis points in the quarter, largely due to the fourth quarter payoff of our BTFP borrowings Loan yields were 6.33% in the quarter, down 9 basis points as a result of the full quarter's impact of the December interest rate cut. New loans came on the books just shy of 7% in the quarter, which is well north of the total portfolio yield, and we continue to have variable rate loans repricing over time. These dynamics help minimize the impact of any interest rate cuts as we look forward through the year. Total cost of deposits kept pace, likewise declining by 9 basis points to 2.35%. New CDs in the quarter came in nearly 20 basis points lower than last quarter at an average rate of just over [ 4 ]. Our cumulative total deposit beta, excluding brokered funds, ticked up to 30% through the first quarter. Our total adjusted revenue was down just slightly less than [ 0.5% ] compared to the prior quarter, primarily due to fewer days in the first quarter. Net interest revenue was down $1.4 million or 0.4% in the quarter due to day count. Adjusted noninterest revenue on Slide 12 was down less than $1 million or 1% in the quarter as strong mortgage origination income was offset by lower credit-related fees and the impact of market volatility and number of days on wealth management revenue and deposit service charges, respectively. Even so, our adjusted efficiency ratio improved notably to 57.6%, down 150 basis points from the fourth quarter, driven by lower expenses as we detail on Slide 13. While first quarter typically has higher expenses, our adjusted noninterest expense actually decreased by just over $8 million or 3%, driven largely by a $6 million decrease in data processing and software expenses as those expenses normalize for what was an elevated fourth quarter. Total comp expense increased just $600,000 as seasonal increases in employer FICA and 401(k) contribution costs were partially offset by lower commissions and incentive costs. Turning to credit on Slide 7 and 8. Net charge-offs for the first quarter were $23 million, with about 2/3 of that due to 1 previously impaired credit. Nonperforming loans declined 11% or $29 million in the first quarter, while criticized loans were up 2% and classified loans were down 2%, so pretty stable overall. Our loan provision was $20 million, increased slightly from the prior quarter due primarily to a bit more conservative macroeconomic outlook. When you combine our allowance coverage of 1.34% with our strong and growing capital foundation laid out on Slide 14, we believe our balance sheet is well positioned should there be economic disruption in the near future. Our 2025 guidance is on Slide 15. We continue to feel comfortable with the ranges we shared last quarter in all categories, and to further clarify, believes that even with the May 1 close of first [indiscernible] that we will still be within these ranges, potentially the higher side of the ranges on the balance sheet side with First Chatom Inc. but the revenue and expenses just won't have a material impact this year given the timing and size of the transaction. We are excited about expanding our presence in Georgia and continue to be optimistic on our footprint for both organic growth and M&A filling opportunities. Operator, we would like to open the call to questions, please.

[Operator Instructions] And your first question today will come from Manan Gosalia with Morgan Stanley.

Just looking at the loan pipeline, it feels like you're not really seeing the impact of the April 2 announcements just yet. You noted that loan pipelines remain solid, and I think you just pointed to the higher end of the loan growth guide. Can you maybe expand on what you're hearing from clients post April 2? And what gives you the confidence that, that level of loan growth will continue?

Sure, I'll take a stab at that, if I'm coming through on the line. You hear me, Manan?

I can year you fine.

You can. Technical issues this morning. Glad to hear that you're there. Good morning. So yes, we thought we were pleased with what happened with our loan pipeline in the first quarter. We have seen very little, if any, impact so far of the noise. So like you said, it was April, it was after first quarter end. So when you talk about the macro environment, we continue to watch, we continue to listen, we continue to pay attention to what our customers are telling us. There's a lot of noise out there. I think, today, customers are beginning to sit back a little bit and maybe slow. But in the first quarter, we didn't experience any of that. Billy?

I mean our current pipeline, we've got a couple of select callout areas. I mean our equipment finance, our CRE, they're the best pipelines we've seen in years. Regionally, I'd say Texas is the highest, Georgia as well. We've got competitive factors that are still driving win rates. But as far as tariff control, I mean, just anecdotal issues of, hey, we're trying to evaluate how it's going to impact us? If it's going to -- some have taken advantage of it. They pulled some sales and deals forward. But as far as immediate impact on pipeline, we're just not seeing it. It's still staying solid.

Got it. And then maybe flipping over to the deposit side. Broker deposits came down about $200 million or so Q-on-Q. And you noted that there was about $1.8 billion in CDs that matured during the quarter. Can you remind us how much in higher cost deposits roll over through the next of the year? And how much of a benefit you expect to get there?

Yes. Sure, Manan. So we've got about another $3 billion, $3.5 billion of time deposits that mature in the second quarter. Those are just north of [ 420 ]. What we saw this quarter was really the new CDs just new to the bank coming in just north of [ 410]. When you look at the kind of the new and renewed rate though, that was lower and closer to about [ 360 ]. So there's still some incremental benefit that we anticipate seeing as some of those time deposits continue to come on board and renew at a little bit lower rates.

And I think we're are looking to fund -- we want to fund with the best our lowest possible funding source. And so what we saw in the quarter was brokered CDs were more expensive than wholesale funding for the home loan bank, right?

Yes, yes. I think it was asking about the time deposits, but...

You said our broker deposits went down.

Yes.

Yes. And just to clarify, Valerie, the numbers you just mentioned include both brokered CDs and non-brokered time deposits?

They do. Our broker came down about -- yes, to your $200 million. So the bulk of it was really considered core customer time deposits is what we're talking about.

And your next question today will come from Jared Shaw with Barclays.

Maybe sticking with the margin theme. You talked a little bit about yield compression from competition? How should we think about sort of the the loan yields in the face of growth here and how that's sort of impacting your view of the margin as we go through the rest of the year?

Loan yields came on good in the second than the first quarter...

Yes, just right below 7% or where the new loans came up.

Yes. So -- but we're certainly seeing the competition. Billy, you've been talking about that for weeks now. You want to talk about the competition?

Yes. I mean, for the larger high-quality deals, we're seeing 25 basis point yield compression on loans, I would say, across the board. What we're really noticing it is in kind of our merchant CRE construction portfolio, but more broadly, we're seeing it on completed deals as well. So I'd say 25% and some is even 50%, but up 50 basis points for the most part, though, around 25 basis point compression we're seeing over the last 3 months, I would call it.

But on your question on the margin, what we are seeing a little bit of that compression on the loan yields, and we would expect, as we go through the year, if we get the rate cuts that are anticipated, obviously, it will impact the loan yield. But given the time deposit repricing as well as just our ability to kind of react quickly to rate changes, we anticipate being able to match that on the deposit costs as we go through the year. So with the outlook today, a fairly stable net interest margin as we go through the rest of the year.

Okay. All right. And how should we think about capital priorities from here, Dan? It sounds like you're open to looking at deals with the success of the Georgia deal. But how should we think about sort of the dynamic of buybacks and M&A and sort of other uses of capital?

I don't think anything has changed. The macro environment clearly causes us to want to step back a little bit and look and see what's there. But I think that the same objectives we've had all along, organic growth is number 1 goal for us. We want to continue to grow the company. We want to continue to grow within our footprint. All of the other tools are there and in the toolkit, and I think we will use them when they're appropriate.

Your next question today will come from Catherine Mealor with KBW.

Just a follow-up on the revenue and the NII outlook. So or, if the margin is fairly stable for the rest of the year then to kind of get to the mid- to high end of the revenue guide, probably means we need more balance sheet growth. And so just -- I know this quarter was more of a function of the full quarter's impact of the [indiscernible]. But just kind of curious how you're thinking about just the size of the balance sheet, in particular, the bond to bond book and kind of excess liquidity as we move to the back half of the year?

Sure. Yes. Specifically to the bond book, you may have noticed we did add a little bit of borrowings in the quarter. Federal Home [indiscernible] bank borrowings, we added just shy of $800 million of those. And we use that to buy some short-term agency securities at basically about a [ 1:20 ] spread, [ 1:15 ] spread. And so that will add, obviously, to the balance sheet side, but also as we go through the rest of the year, had some really nice income, almost as a hedge, if you will, but potentially while we're seeing good pipelines and good loan growth, there's just a lot of volatility in the economy right now. And so I thought that was a prudent way to protect that net interest income stream. And so when I talk about a stable margin, I'm really talking about net interest margin percentage. But we do anticipate with the estimates that we've put out there on our guidance to continue to meet those and seeing a little bit of balance sheet growth as we go through the year.

Okay. Great. And then that variable rate, if we look at my favorite slide, as you know, the one that breaks out the variable rate loans by type and maturity and then the rate. As we look at that variable rate loan, that was a lot more stable this quarter at [ 6.17% ]. Do you still think that even as we get cuts that piece can still move higher? Or are we around at equilibrium with that piece of your loan book today?

In the near term, it's fairly stable. If you look out at the next 1- to 3-year bucket, that's when there's opportunity for that to improve. But you're right. Through the rest of the year, that number, based on average, will be fairly stable.

Your next question today will come from Brett Rabatin with Hovde Group.

Wanted to ask about the loan growth guidance within the context of energy? And just obviously, you guys had some payoffs in the energy bucket. I wanted to see if the guidance contemplated that coming back? Or if that continues to maybe atrophy a little bit?

Yes, I don't know that any 1 bucket of loans is going to move the overall guidance that we've got out there. So when you talk about guidance, I think the footprint that we're serving today, we're really proud of what happened in Texas and Georgia and Florida. We think we continue to have opportunities within our footprint. We think we will continue to be able to grow -- the lines of business from quarter-to-quarter can bounce all over the page. Billy, we did see some energy change.

Yes, we did. I mean so mostly in midstream. Term Loan B market and some M&A activity created some paydowns, but we also added non-new transactions. And I would suggest that, that activity is creating an opportunity for us as well. So I anticipate that, that will continue to kind of stay level. It's just when paydowns happen at once, it takes a minute to pull back in that 1 segment. We've also got a renewable and power segment that's been on a -- it's a newer business, probably only a couple of years old. It continue to see some fantastic inroads. Those guys are making our name out there -- well known out there in that sector. And then our C&I teams across the various footprints have had a good quarter and we continue to see that just based off our footprint. I mean, Texas and Georgia specifically, they're really seeing some good momentum.

Yes. We've seen momentum in the community bank. So again, what I like most about our company is the people we've got out front taking care of customers across the footprint. I think we've got real opportunity to continue to grow.

Okay. That's helpful. And then just back on the capital toolkit, Dan, I'm just curious to hear your perspective on the outlook for M&A, if you're having any conversations or if it's pretty quiet with the uncertainty at this point?

The volatility in the market causes people to sit back and think, but you're going to see -- transactions are going to continue to happen. Consolidation is going to continue to happen in the marketplace just like we were talking about the noise that's out there. There's a lot of noise. People are trying to figure out what the noise is and how that impacts us.

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

The CRE comment, I think you said it's as robust as it's been in years. Can you talk a little bit more about what's driving that? And even though it's more competitive, is it acceptable to you guys to put on more CRE?

There are some great opportunities out there on the CRE side. Billy and Chris can certainly jump in here. But when you look at what -- and I specifically called out the merchant CRE side, so you're talking about the big gold plated, large merchant developers that are out there developing projects that are really good. And so what we see is as we continue to have some projects that will move off of our balance sheet at some point in the not-too-distant future, we believe. And so when you look back at what's happening, there's still opportunities. And it's coming in, in the industrial space. It's coming in the multifamily space and it's coming across our footprint because of the in-migration of people. Billy or Chris?

Yes, John, that's right. So we're seeing -- and keep in mind that we're still getting 55%, 60% loan to cost on these. So we won't see the fundings out of these for 12 to 18 months, and it's backfilling that portfolio that as they start selling, we're having to backfill for when that occurs. But yes, it's multifamily, it's an industrial and it's in the markets that we're serving. So we're seeing -- it's just good robust activity. It's more than we've seen just in the last couple of years. I mean, not since the beginning of time, but just in the last couple of years, we're seeing more activity than we had.

I would just add the -- we've got your question, do we have room, yes, we've got room both on the CAD and the total CRE bucket I think we put that in these slides, but we have room there. The -- and it's coming from the community bank as well. So Billy mentioned the merchant type. But as a bread and butter product for us across community banks. So all that real estate activity is just good bread and butter for us. So we -- and it's hanging in their head. Why is it picking up a little bit? I think the SBB, the liquidity crisis have put a lot of pause on a lot of deals and pipeline months ago. And so you're seeing some of the more strategic thinkers that are thinking 3 years out getting back into the market.

It takes a while to become it is online. does that help you, Jon?

Yes, that helps. Valerie, 1 for you on expenses. You obviously had a pretty strong performance on expenses. But anything to call out to maybe set us up for what the second quarter might look like on expenses given the performance in Q1?

Yes, sure. Yes. We were really pleased with our expenses. There were a few things tweaking some of the long-term incentive plans that brought it down a little bit. But overall, kind of across the board, really nice expense management. As we look out for the rest of the year, we do expect quarterly expenses to increase and still within our guidance of -- I believe, we had 4% to 6% for the year. So I still think we're okay there and that's going to factor in continuing to grow in our businesses. We're growing with good talented people with good technologies that help our efficiency and effectiveness. So we're looking to continue that and go through the year. And so that's, at this point, what I would expect.

And your next question today will come from Matt Olney with Stephens.

Just want to follow up on the bond purchases and the borrowings behind that, that Valerie mentioned. It looks like this probably came later in the quarter. Any color on the timing of that trade? And any color on just the duration of this trade?

Sure. It was in the last month of the quarter. And like I said, it's about $785 million of securities. They're 0 to 20% risk-weighted agencies, 2.5 duration, about north of [ 530 ] on yield, and that's spended by borrowings that are about [ 420 ] million, so getting some nice incremental spread there. Depending on where spreads are and so forth, we may end up doing a little bit more of that in the second quarter. We'll kind of see where the rest of the balance sheet falls. But again, just really kind of a little bit of incremental earnings impact for us while we had plenty of capacity on the borrowing side and took advantage of a little bit of spread differential there.

And just a follow-up on that, Valerie. It sounds like there is potential to do more of this in the future. Should we consider this with respect to loan growth, if the loan growth slows that the macro deteriorates, this could become potentially more attractive to you guys in the future?

It's really about the spread. And so depending on what that could look like, that is an option.

It's all around the spread.

Yes, yes. We had significantly reduced our securities book, as you know, over the past couple of years. We were down to about 15%. And so we're still well south of 20% and would anticipate that we kind of stay in that range in the foreseeable future. But there's certainly ability to do a little more there should we desire to with the rest of the balance sheet mix.

And your next question today will come from Michael Rose with Raymond James.

Just 2 quick ones. Just on the pickup in line utilization. I think that's something we've seen from a bunch of banks across the reporting period so far. Anything to read into that? Are you guys actually adding lines or just looking for some color there.

I don't think there's anything to add into that. What you've seen on ours is up and down. You've got construction draws that fund into that too. I wouldn't read anything into that at all.

And it's really within a [indiscernible]. I mean it's really small. Yes.

Got it. I think some of us are still reeling from the liquidity crisis during COVID and...

I understand.

We all have PTSD for that, yes.

Yes, yes. That's a better way to put it. Just 1 follow-up for me, just kind of sticking with that theme. You guys, obviously, with the MOE, worked out some of the legacy cadence, restaurant exposure. You have some retail. You laid out really nicely in Slides 5 and 6. But any areas that you guys are particularly focused on or that you're seeing some concern expressed from customers? I know some of it's obvious, but just wanted to get a better feel for what you guys are doing internally, assuming this could potentially go on for an extended period?

I think the credit quality picture continues to look stable for us. I mean we saw a little bit of improvement in a couple of different categories. We saw a deterioration in a couple of categories. Charge-offs were higher off of really just 1 bigger credit. I think we feel good about where we sit today. The macro environment causes everybody to stand back and say, okay, well, let's see if we can figure out where it's going to come from. I don't know that we're seeing any of that today. Chris?

It's hard. I mean there's a ton of conversation going on. It's that uncertainty definitely creates some anxiousness across customer set. And that's all of them, right? I mean, it's farmers, builders, developers, manufacturers, retailers, importers. So there's -- we're having a lot of conversations. All of our frontline folks are talking with their clients. We're reporting back up to all of our credit processes and our loan approval processes what the current view of the tariff impact would look like, but because of that uncertainty, it's just hard to handicap it. And we haven't seen it impact our credit numbers today. And specifically to your question, we haven't identified any segment or particular line that's -- that we're overly concerned about. It's really a credit-by-credit type process that we're going through. And all of that could temper a little maybe loan activity or exuberance, I guess, could be tempered a little bit until some certainty gets into the market.

It's a mix, and just the handful of customers that I talked to in the manufacturing business, a couple of them are telling me you can see a benefit here that this is going to probably help them produce more. Other manufacturers are telling us they're importing most of the inputs, and this is going to -- they're going to have to pass along every bit of the cost increase could be detrimental to them. So it's a mixed bag when you push on what's happened today, still a lot of not a lot of action.

And your next question today will come from Casey Haire with Autonomous Research. Moving along, we have Stephen Scouten with Piper Sandler.

[indiscernible].

We're not getting you, Stephen, I don't know if it's your into our end, but we're not hearing your question.

Okay. Any chance you can hear me out there?

Yes, we can. That's better.

Okay. I don't know what changed, but -- so just kind of curious about how you think about the loan-to-deposit ratio potentially levering up the balance sheet from here?

Yes. I think we continue to look to grow deposits. But I think when we look about where we sit today, I think we like the position we're in. We would like to continue to grow deposits. We would like to hang out in the neighborhood where we are up a little bit, down a little bit, but I think we feel comfortable where we're sitting today. That's 1 of the things we like.

Got it. Great. And maybe how do you think about incremental M&A? Obviously, the valuations make everything a little more difficult. But given the quick full time line, does it change your outlook on how you think about M&A in the years to come? Or maybe the amount of deals you might be able to put together.

Not really. I think from an M&A perspective, we're looking for culture. We're looking for the right fit, and I don't think that the speed or the valuations change that. You're still looking for the right folks for us. [indiscernible] Speed is a good thing. We like to speed. The FCB deal was good. We're pleased to be able to get that completed and closed. We'll close that in a couple of weeks here. That's faster than thought. We like all of that, but it's still around people bank with people and the culture is going to be a critical component.

Yes, makes a lot of sense. And then just lastly, real quick on mortgage income, looked like a pretty good quarter here. Do you think there's an inflection point anywhere, whether it's around the 30-year rate or or just lower rates in general where we could see a more material pickup in mortgage more broadly or kind of how you're thinking about expanding your teams there...

The fact that the 30 years jumped up in the last week or so, certainly is not helping that team at all. That's a hard question. I don't know what the rate needs to get to, to see a big change. In some of our markets, it is a tight, tight housing market. And so that's part of the picture to is the inventory is just not there. It's an interesting place we find ourselves today. The newer homes, the big builders are buying down rates for first-time homebuyers, which is a positive. It's an interesting environment. Valerie, do you want to talk about mortgage?

Yes. They had a great first quarter. Typically, first quarter is really [ low ] seasonally. But even when you look at its last year really up several hundred in origination. So really nice performance there. The teams continue to do well. To really gear up some of those refis, I mean, it's going to need to drop 50 basis points from here probably...

Or more.

Or more, yes, at least to start getting that engine running, but...

From a year ago, 1 of the things that the mortgage leadership team, Scott Dick and his team do, we've retool upscaled our team. So the team that's out there in front of us today on the mortgage group, like talking about Billy's team a minute ago and the community bank team, we're really proud of the folks we've got out taking care of customers.

Exactly. If I get that that for us.

Another way, when the refi boom hits, when it hits, if it hits, we're going to be positioned well between the manager brought a lot of different areas, including some expanded footprints that are new to us.

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

All right. Thanks, Nick. It's certainly an exciting and busy time for Cadence Bank and for our industry. We believe we're in an excellent position to be able to continue our path of operating performance improvement. I'm extremely proud of our team's efforts and our progress over the past few years and have high confidence that our unique operating model will support our vision of helping people, companies and communities prosper. Thank you for joining us today. We look forward to visiting with you all again soon.

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