Cadence Bank - Q2 2023
July 25, 2023
Transcript
Operator (participant)
Good day. Welcome to the Cadence Bank Q2 2023 webcast and conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then one on your touchtone phone. To withdraw your question, please press Star, then two. 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.
Will Fisackerly (EVP and Director of Corporate Finance)
Good morning, thank you for joining the Cadence Bank Q2 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 presentation 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.
Now I'll turn to Dan for his opening comments.
Dan Rollins (Chairman and CEO)
Good morning, everyone. Thanks for joining us today to discuss Cadence Bank's Q2 2023 financial results. I will provide a few highlights. 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 non-routine 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 Q2 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 Q2 seasonality.
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 in 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 non-interest expense. We also refined our savings estimates related to the efficiency initiatives that we discussed in our Q1 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 reduced non-interest expense by approximately $35 million-$40 million annually. The majority of these actions associated with these initiatives will be implemented during the Q3, and we expect to reflect the full benefit by the Q1 of 2024. Valerie, I'll turn the call over to you.
Valerie Toalson (CFO)
All right. Thank you, Dan. Looking at the results for the quarter, we see four 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 at $334 million for the Q2, a decline of approximately $21 million compared to the Q1 of 2023. Of the decline, $5 million is related to lower accretion income compared to the Q1, with the remainder being driven by accelerated funding costs. Our net interest margin was 3.03% for the Q2, 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 maintained those balances in the Q2. Factoring out brokered deposits, our core customer cost of deposits increased 45 basis points in the Q2, as we continued to see migration from non-interest bearing products to interest bearing. The percentage of non-interest bearing to total deposits declined from 29.2% at the end of the Q1 to 26.4% at the end of the Q2. Our yield on net loans, excluding accretion, was 6.18% for the Q2, up 31 basis points from the prior quarter. 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 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 non-interest 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. Non-interest revenue, highlighted on slide 14, was $132.3 million. Excluding the securities losses, non-interest revenue increased approximately $7 million, or 5.5% compared to the Q1. Insurance commission revenue increased $6 million, or 15% linked quarter. Impressively, insurance revenue has grown 14% compared to the Q2 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 non-interest revenue was largely the result of timing of elevated FBA and credit fees related to activity in the Q1 that we had earlier this year. Moving on to expenses, which are highlighted on slides 15 and 16. Total adjusted non-interest expense declined $8 million, from $305 million for the Q1 of 2023 to $297 million for the Q2. 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 Q1 of each year.
Data processing and software expenses declined $3.9 million on the linked quarter basis, including the results of savings associated with vendor contracts and service agreements. Other miscellaneous expenses declined $3.6 million compared to the Q1, 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 estimate associated with our strategic efficiency initiatives to $35 million-$40 million annually. The 35 branch closings will occur during the early part of the Q3, and the early retirements and other personnel savings will be phased in over the course of the rest of 2023.
We incurred non-routine costs of $6.2 million in the 2nd quarter associated with these initiatives, and we anticipate incurring an additional $10 million-$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 1st, we expect our quarterly adjusted non-interest expenses to decline in each of the 3rd and 4th 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 1st 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 Q2, 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. Non-performing loans and non-performing assets improved slightly compared to the Q1, 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, 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 positives this quarter, there is a lot of momentum as we look forward. We expect stabilization in our net interest margin, CRE businesses continuing to perform well, 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 (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question and one follow-up. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Catherine Mealor with KBW. Please go ahead.
Catherine Mealor (Managing Director and SVP)
Thanks. Good morning.
Chris Bagley (President)
Good morning, Catherine.
Catherine Mealor (Managing Director and SVP)
I'm sure on the margin, Valerie, I found your commentary on the updated betas interesting, especially the loan beta that you're pointing to a 50% cumulative beta as we end the year. 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, as you see deposit cost and maybe the mix shift stabilize, I mean, you're pointing to a stabilizing margin, but is it possible to even see the margin starting to increase? Maybe next quarter is too soon, but as we're exiting 2023 and into 2024, just given your outlook for how you see loan yields repricing. Thanks.
Valerie Toalson (CFO)
Thanks, Catherine. Great questions. First of all, I will say that what we are anticipating is one rate increase in the Q3 and then no more for the rest of 2024. Or excuse me, for the rest of 2023, and then nothing really until the middle part of 2024. That's really the foundation for these assumptions. To your question, yeah, we've included the slide again in our slide deck that shows the loan pricing characteristics. 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. You know, could it improve as we go toward the end of the year? Absolutely, if deposits, you know, behave properly.
Chris Bagley (President)
Obviously, behave properly. Deposits behave.
Valerie Toalson (CFO)
That's exactly right. You know, I think what we saw in the Q2 was a bit unusual for the whole industry. You know, if we were to see another quarter like that, then, you know, that certainly wouldn't be the dynamic. What we are looking at, based on some of the recent trends, the slowing, like I said, of some of the migration out of non-interest bearing. Still expecting some continued migration. Don't let me mistake that there, as well as some continued deposit runoff. Again, a somewhat slowing of those trends, so that's what's built into that stabilization comment.
Catherine Mealor (Managing Director and SVP)
Got it.
Chris Bagley (President)
We continue to believe higher for longer is better. You know, higher for longer can be better for us.
Catherine Mealor (Managing Director and SVP)
Okay, great. In that, on the non-interest bearing remix, what's your... I mean, I know we just have no idea, 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 maybe especially the back half of the quarter as that stabilizes?
Valerie Toalson (CFO)
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 2024, but that's probably a little too early to call at this point.
Catherine Mealor (Managing Director and SVP)
Got it. Okay. If we blend together Cadence and legacy BancorpSouth, you know, back in 2016, you were at about, I think, about 26%. Just a little bit below, maybe pre-COVID levels on a combined basis, it feels like, but not drastically lower.
Valerie Toalson (CFO)
That's based on, you know, 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. Yeah, that's exactly right.
Catherine Mealor (Managing Director and SVP)
Okay. Okay, great. Can you just give us a flavor for where new deposits are coming on today, maybe in your different products, CDs and money markets?
Chris Bagley (President)
Most of the new deposits are coming on the CD on the high end. You know, we're seeing a little bit of win on non-interest 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 side.
Catherine Mealor (Managing Director and SVP)
Okay, great.
Chris Bagley (President)
I mean, I might just add to that.
Catherine Mealor (Managing Director and SVP)
Yep, go ahead.
Chris Bagley (President)
I might just add a little color to that. I mean, we are, you know, 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 our legacy Cadence folks had seen in the first couple of quarters. I feel very good about where the pipelines are on the corporate side going forward.
Valerie Toalson (CFO)
I would just say from the CD promotional rates, those are, you know, to your point, Catherine, 5%-5.25%, is the pricing that we're seeing right now. Many markets, you know, are probably in the 3.5% level.
Catherine Mealor (Managing Director and SVP)
Great.
Valerie Toalson (CFO)
Different.
Catherine Mealor (Managing Director and SVP)
Great. Thank you. Thank you, thank you.
Chris Bagley (President)
Thanks, Catherine. Appreciate it.
Operator (participant)
Our next question comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose (Managing Director)
Good morning, everyone. Good morning, Dan. Thanks, everyone, for taking my questions. 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, you know, how much matures, and was kind of taken on in a short-term nature and the depths of the failures in March. Thanks.
Valerie Toalson (CFO)
Yeah, sure. Yeah, it did come down a little bit. We did You know, most of those were fairly short term, 3,6, 9-month type of brokered CDs and brokered 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.
Michael Rose (Managing Director)
Okay, that's helpful. Just to kind of, you know, backing up on Catherine's questions that and the guidance that, you know, sounds like maybe a little bit more pressure on the NIM in the Q3 and, you know, maybe a little bit more pressure on NII, but, you know, that should kind of stabilize to rebound in the Q4. Then you have a pretty big gap between the loan beta and deposit beta expectations, even though deposit betas, you know, rose from your prior expectations. Is that kind of just broadly speaking, the way to read it, Valerie?
Valerie Toalson (CFO)
You know, I think as we look to the rest of the year, we think there's opportunity to stabilize the margin really throughout the last half of the year, not just in the, in the tail end of it.
Dan Rollins (Chairman and CEO)
It's back to deposits behaving appropriately.
Valerie Toalson (CFO)
It's the moment.
Michael Rose (Managing Director)
I did hear those sirens in the back, Dan, earlier, so I, you know, maybe you guys got the cops after those depositors.
Dan Rollins (Chairman and CEO)
That's right.
Valerie Toalson (CFO)
That's right.
Michael Rose (Managing Director)
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. You know, I think, you know, you'd mentioned that you'd expect deposits down kind of third and then into Q4 as a result of that. You'd kind of previously given a range of $290 million-$300 million, but you have these extra costs, you know, 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 as we get into the Q4? Thanks.
Dan Rollins (Chairman and CEO)
You've got a couple of things going on in this quarter and 3Q. Number one being the impact of annual salary changes. We do that effective July 1, so that's an add to the Q3 run rate there. We also see the savings that are coming in. You know, I think the $35 million-$40 million that we're going to harvest out in the back half of this year, you'll see all of that in the Q1. That's a $10 million a year, $10 million a quarter drop off of, you know, the numbers that you see today, you're back into the investing. You've got the upside. The only significant up that I'm aware of today would be the salary changes in 3Q.
Is that Valerie?
Valerie Toalson (CFO)
Yes. No, that's exactly right. Then on a GAAP basis, some of the one-time costs.
Dan Rollins (Chairman and CEO)
Yeah.
Valerie Toalson (CFO)
We'll identify those quickly.
Dan Rollins (Chairman and CEO)
Yeah.
Valerie Toalson (CFO)
Yeah.
Michael Rose (Managing Director)
All right, perfect. I'll step back. Thanks for taking my questions.
Dan Rollins (Chairman and CEO)
Thanks, Martin.
Operator (participant)
Our next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia (Equity Analyst)
Hi, good morning.
Dan Rollins (Chairman and CEO)
Hey, good morning.
Manan Gosalia (Equity Analyst)
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? You know, I think you just made a comment that, you know, part of your guide was based on the more recent flows that you are seeing, and many of your peers have also noted that June was better than April and May. I was wondering if that was something you saw as well?
Dan Rollins (Chairman and CEO)
Yeah, that's exactly right. You know, April was the worst month of the quarter.
Valerie Toalson (CFO)
Yeah.
Dan Rollins (Chairman and CEO)
We got better in May and June, and that's why you're seeing this model and have some confidence that we're stable.
Manan Gosalia (Equity Analyst)
What do you think, drove that? Was it just improving customer behavior? Was it better management of liquidity? Or was it, you know, just more conviction that the environment is improving, so you know, you were able to, you know, price your deposits appropriately and manage liquidity more appropriately?
Dan Rollins (Chairman and CEO)
I think the customer behavior in April was all a result of the March madness in the banking industry. That's what we were dealing with in April. Things have calmed down since then.
Manan Gosalia (Equity Analyst)
Got it. Okay, perfect.
Valerie Toalson (CFO)
We've just seen. Yeah, go ahead. A little bit more stability.
Manan Gosalia (Equity Analyst)
Sorry, I was-
Valerie Toalson (CFO)
In the behavior, the outflows, and the pricing as we've gone through the quarter.
Manan Gosalia (Equity Analyst)
Got it. All right, perfect. In terms of the 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. 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?
Valerie Toalson (CFO)
Sure. Yeah, we brought down our cash levels about three and a half billion dollars, or, yeah, about three and a half billion dollars this quarter, and that was really because of the excess cash that we put on at the end of the Q1. You know, it's 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 is the historical norm. Over time, you know, that may dwindle down, maybe another half a billion dollars or so.
Dan Rollins (Chairman and CEO)
We're comfortable with that.
Valerie Toalson (CFO)
Yeah, to a more normalized level, but we're comfortable where we are today. Yes, you are right. We actually did replace some Federal Home Loan Bank borrowings with 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. It was a net improvement for us on the margin and on our expense costs.
Manan Gosalia (Equity Analyst)
Got it. You just substituted part of the FHLB with BTFP?
Valerie Toalson (CFO)
That's exactly right.
Manan Gosalia (Equity Analyst)
All right, perfect. Thank you.
Valerie Toalson (CFO)
Saved a little money to boot.
Dan Rollins (Chairman and CEO)
Thank you. Appreciate it.
Operator (participant)
Our next question comes from Brandon King with Truist. Please go ahead.
Brandon King (Managing Director and Senior Equity Research Analyst)
Hey, good morning.
Dan Rollins (Chairman and CEO)
Hi, Brandon.
Brandon King (Managing Director and Senior Equity Research Analyst)
Yeah. I wanted to touch on loan growth. Obviously, it's slowing its back half of the year, but could you give us some more context behind what's driving slower loan growth? With the stronger seasonality of resi, are we expecting resi to be a bigger contributor in the back half of the year as well?
Dan Rollins (Chairman and CEO)
Strong. Say that last part again, the strong?
Valerie Toalson (CFO)
Because resi was a strong contributor.
Dan Rollins (Chairman and CEO)
Oh, resi.
Valerie Toalson (CFO)
in the quarter.
Dan Rollins (Chairman and CEO)
Yes. Yes, yes, yes. Yeah, yeah. Second quarter residential will drop back. You know, remember, you know, the Q3 will drop back from Q2. We expect to see that to drop. The, the secondary market is improving a little bit there, so the stabilization in rates is helping the secondary market. That's what you're seeing. On our side, what's coming on the balance sheet is ARM product. That ARM product, hopefully will 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 our process ourselves is seeing much less, coming through the pipeline, but lots of people are in the room here, Hank and Chris and Billy.
Hank Holmes (CBO and President)
I think you're exactly right. We've seen a 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. At the same time, we are very keenly focused on the deposit generation and what that looks like the second half of the year. I think in general, you're just seeing an overall credit tightening within the industry.
Valerie Toalson (CFO)
I'd say as part of that, you know, there's a little bit of tightening on the spreads that comes as part of that.
Dan Rollins (Chairman and CEO)
Sure.
Valerie Toalson (CFO)
You know, by being able to be a little more selective, it allows us to do a little bit better on pricing.
Brandon King (Managing Director and Senior Equity Research Analyst)
Got it. Just follow up on that, since the industry is tightening in general, is there any appetite to kind of take market share with, you know, higher credit spreads and kind of being more opportunistic in this sort of environment?
Dan Rollins (Chairman and CEO)
Yeah, we've told our team absolutely, to be out talking to the customers that you've been wanting to bank for a long time. you know, 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. We're being selective.
Brandon King (Managing Director and Senior Equity Research Analyst)
Okay.
Valerie Toalson (CFO)
Focusing on the customers that have profits, as well, is a key component to the lending that we're doing today as well.
Dan Rollins (Chairman and CEO)
Yeah, we need a full relationship.
Valerie Toalson (CFO)
Absolutely.
Brandon King (Managing Director and Senior Equity Research Analyst)
Yeah. 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?
Valerie Toalson (CFO)
I mean, we're probably not going to give specific numbers, but I mean, you know, like I said, April was the biggest deposit cost change that we saw, on a % basis, and then that trended down throughout the rest of the quarter. That's what gives us...
Brandon King (Managing Director and Senior Equity Research Analyst)
Okay.
Valerie Toalson (CFO)
you know, some of the projection basis that we have going forward.
Brandon King (Managing Director and Senior Equity Research Analyst)
Okay. Thanks. Take more questions.
Dan Rollins (Chairman and CEO)
Thank you, Brandon.
Operator (participant)
Our next question comes from Brody Preston with UBS. Please go ahead.
Brody Preston (Equity Research Analyst)
Hey, good morning, everyone.
Dan Rollins (Chairman and CEO)
Good morning.
Brody Preston (Equity Research Analyst)
Valerie, I wanted to follow up on the loan beta commentary. I was hoping maybe on the 3-12 month bucket that you guys give in the deck, you got about $2 billion of loans that are repricing within the next 3-12 months, and they have a 5.76% loan yield, you know, I guess, where does the loan yield go when those reprice in the, in the current market?
Valerie Toalson (CFO)
Yeah. What we saw in the past quarter was renewed loans coming in, you know, somewhere in a quarter-ish range, give or take a few basis points, depending on the type. That's a meaningful bump from what we see on there. Now, that's going to have, you know, mix depending on what the product is. Loans or better mortgages obviously are lower than that. That's what we saw in the renewed loans that came on in the Q2.
Brody Preston (Equity Research Analyst)
Okay. That'd be like a 250 basis point pickup or so on 4%-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 from the book, I guess maybe beyond the, what's in the 3-12 month bucket. I was just trying to square those comments.
Dan Rollins (Chairman and CEO)
Yeah. It's higher for longer, continues to allow us to reprice assets forward that have not repriced yet.
Valerie Toalson (CFO)
Yes. Combined with the loan growth that, you know, we've been able to see, even though it's slowing, that will still be a contributor to those betas as well.
Brody Preston (Equity Research Analyst)
Okay. On the non-interest 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, or do you mean the dollars actually grew? Just because the average and the period-end declines aren't too dissimilar. They're both 11% to 12%. I was just trying to make sure I understood. Was it June was just down less than April was?
Valerie Toalson (CFO)
From the rate of change, yes, it was down less than April was.
Dan Rollins (Chairman and CEO)
Yeah, you said that right.
Valerie Toalson (CFO)
Yeah.
Dan Rollins (Chairman and CEO)
Rate of change improvement.
Valerie Toalson (CFO)
Yes.
Brody Preston (Equity Research Analyst)
Got it. Okay. 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?
Valerie Toalson (CFO)
Really, that's going to depend on the rest of the balance sheet. You know, we locked that in at rates in the Q2 that are going to be favorable as we go forward. We can maintain that, you know, for a little while. 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.
Dan Rollins (Chairman and CEO)
You're quoting a quarterly average rate.
Valerie Toalson (CFO)
Yeah
Dan Rollins (Chairman and CEO)
-balance on that, and I'd be looking at the quarter end on that.
Valerie Toalson (CFO)
Yeah, quarter end was $ three and a half billion and just over a 5% rate.
Brody Preston (Equity Research Analyst)
Okay. Okay, that I guess, the full three and a half billion that I see at quarter end, is that all BTFP?
Valerie Toalson (CFO)
Yeah, that's right.
Brody Preston (Equity Research Analyst)
Okay. Okay, thank you.
Valerie Toalson (CFO)
The vast majority.
Brody Preston (Equity Research Analyst)
All right. I did just want to follow up with just 2 last questions. Just on the, on the July 1, the merit-based increases, that you referenced, can you give us a sense for what the, I guess, what the dollar size amount, is that it, of that is, just so we can make sure we're modeling the quarterly variations, given the, all the moving parts from the cost savings and that?
Valerie Toalson (CFO)
Yeah, it's three and a half million-$4 million per quarter.
Brody Preston (Equity Research Analyst)
Okay. Okay, the last one was I was just trying to understand the nuances in the criticized 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%. I guess, am I understanding the accounting change correctly? Was there anything specific that drove the step up in the commercial criticized classified?
Billy Braddock (CBO)
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 the special mention perspective. That's what moved those numbers. Most of that, those dollars went from sub to special mention in the resi bucket.
Brody Preston (Equity Research Analyst)
Got it. Thank you very much for taking the questions, everyone. I appreciate it.
Dan Rollins (Chairman and CEO)
Appreciate it. Thanks.
Operator (participant)
Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Jon Arfstrom (Managing Director)
Hey, thanks. Good morning, everyone. 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 being up 14% year-over-year, I'm just looking for a little more color on that and what the outlook could be.
Billy Braddock (CBO)
You just described it.
Dan Rollins (Chairman and CEO)
Yeah. The team's doing a great job. You know, as we've said before, we like that business. The team's doing a great job of growing our book of business and retaining customers. 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, you know, like, just like my home premium and my cars that went up in the quarter, everybody's paying more for insurance.
Billy Braddock (CBO)
A bit anecdotal, but I think just we're starting to develop synergies with the commercial teams and the corporate bank, too. It's not a big move, but there's just a lot of energy in that space as we work together.
Jon Arfstrom (Managing Director)
Okay. Outlook for that? I mean, because to me, that would be the driver, right? The new business, not necessarily the hard market.
Dan Rollins (Chairman and CEO)
Yeah. The team's doing a great job. We continue to see ability to grow up that revenues frame. The team's doing a great job at 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.
Jon Arfstrom (Managing Director)
Okay, good. 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.
Dan Rollins (Chairman and CEO)
I think you're right. I think we feel pretty good about credit. You guys talk about provision. Somebody.
Billy Braddock (CBO)
I'll kick it off. You know, 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. From that perspective, we're not seeing any large moves.
Valerie Toalson (CFO)
Yeah
Billy Braddock (CBO)
from a credit perspective. I don't know, Billy or Valerie?
Brody Preston (Equity Research Analyst)
I mean, I don't know what else to say other than, I mean, Jon, you've followed us for a long time. We regularly review all of our credits. Anything that gets impaired, we are early to impair. You know, some of those could get worse, some of those could get better. You know, the ones that get worse from a corporate standpoint are going to be kind of lumpy. We've talked about that in the past. We had one of those this last quarter. That's what drove most of the charge-off. Some of that can continue. I don't see anything systemic, I guess, is a better way to answer that.
Dan Rollins (Chairman and CEO)
That help you?
Jon Arfstrom (Managing Director)
Yep, that helps. Okay, thanks. Appreciate it.
Dan Rollins (Chairman and CEO)
Thank you, Jon.
Operator (participant)
Our next question comes from Matt Olney with Stephens. Please go ahead.
Matt Olney (Managing Director and CFA)
Hey, thanks. Good morning, everybody. 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 then I think it is 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?
Dan Rollins (Chairman and CEO)
Yeah, it's people. You know, the voluntary retirement program that we offered out is still ongoing, you know, we're working through all of that. You know, 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's going to result in payroll cost reduction.
Matt Olney (Managing Director and CFA)
Okay. Appreciate that. I guess, thinking more about capital, I mean, we're seeing your TCE ratio increase a little bit in 2Q. I'm sure it's not quite 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, at what capital level, what are you targeting, where we could talk more about deployment opportunities?
Dan Rollins (Chairman and CEO)
Yeah, 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. You know, we're growing capital, and we've got great earnings coming through the pipeline. We need to make sure that we're prepared for whatever comes our way from an economic standpoint.
Matt Olney (Managing Director and CFA)
Mm-hmm. Okay. Going back to the loan growth commentary, you mentioned a significant part of the growth in 2Q is from residential mortgage and some of those ARMs, and you thought maybe you could potentially sell some of those 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?
Dan Rollins (Chairman and CEO)
Yeah, no, I think we've seen what's in the pipeline has moved more to secondary market product-
Matt Olney (Managing Director and CFA)
Yeah
Dan Rollins (Chairman and CEO)
... from on-balance sheet products. I think we feel like that will slow in the Q3 just from what's in the pipeline that hasn't closed yet now.
Matt Olney (Managing Director and CFA)
Okay. Just to clarify, the commentary about loan growth slowing 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?
Dan Rollins (Chairman and CEO)
Yeah. Let's make sure we're all saying the same thing. We would continue to think that mortgage can grow through the back half of the year at a slower pace. 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. You know, we were a 70%, 65%, 70%+ secondary market production shop, where we were selling things off into the secondary market. When rates started spiking up, the ARM product became very popular. The secondary market for ARM was dysfunctional, and still kind of is, but it's improving. Now, even though ARM is still popular, we're producing more ARM product that is secondary market going out. The things we're closing now, more of that is going out into the secondary market than was before.
Speaker 15
That was an increasing trend as we went through the Q2. You know, to Dan's point, that we'll likely see a little bit more in the Q3. That's not what's driving.
Dan Rollins (Chairman and CEO)
The slowness. That's where I was going.
Speaker 15
The main fullness of the slowness.
Dan Rollins (Chairman and CEO)
Yeah.
Speaker 15
I mean, that'll be a part of it, obviously, but.
Dan Rollins (Chairman and CEO)
That's where I was going. Exactly.
Speaker 15
But, but not-
Dan Rollins (Chairman and CEO)
Yeah
Speaker 15
the rest of it. Yeah.
Dan Rollins (Chairman and CEO)
The whole pipeline has just slowed down. What we're seeing coming through the pipeline from Q1 to Q2 is different. What's in the pipeline today is different.
Matt Olney (Managing Director and CFA)
Okay. Okay, thanks for clarifying. Appreciate it.
Dan Rollins (Chairman and CEO)
Hey, thanks.
Operator (participant)
Our next question comes from Brett Rabatin with Hovde Group. Please go ahead.
Brett Rabatin (Managing Director and Head of Research)
Hey, good morning, everyone. Thanks for the question. wanted to first, see if you had the number for the unfunded commitment change linked quarter. I know you had the negative $10 million provision, related to that.
Hank Holmes (CBO and President)
I don't have that number specifically, other than it's down the other way. I mean, anybody have that? I don't. We can get back to you on it.
Dan Rollins (Chairman and CEO)
Yeah, the.
Brett Rabatin (Managing Director and Head of Research)
Okay.
Dan Rollins (Chairman and CEO)
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 C&I bucket, it's also pulling off of the unfunded.
Brett Rabatin (Managing Director and Head of Research)
Okay. Wanted to make sure I understood, you know, you have a really strong consumer deposit base, and I just wanted 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, for the cost of funds, specifically on the corporate side?
Dan Rollins (Chairman and CEO)
Yeah. What you heard me say was, you know, 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. Dan, do you want to talk about that?
Hank Holmes (CBO and President)
There are a couple dynamics that happened in the first part of the year. First of all, you get taxes, obviously, and you also get bonuses that get paid, and we have seen that over the last 10 years, come down in the corporate world. It's pretty seasonality. There's some seasonality to it. There's also, as rates have risen, the difference between, you know, paying 1% for a deposit versus paying 4%-5% is really eye-opening from the CFO perspective. We're getting a lot more push to move those out of the DDA and into the interest-bearing accounts.
In addition, as we saw in March with some of the issues there, some of our clients also sought secure positions, seeking FDIC insurance or money market mutual funds that move some deposits out to reduce some of those larger depositors. We've seen some of that come back, and some stabilization there. I am hopeful, and is what we've seen historically, see some of those corporate deposits rise the second half of the year to offset some of that decline.
Brett Rabatin (Managing Director and Head of Research)
Okay, that's helpful. Just last quick one for me. I know the AOCI improved a little bit linked quarter, and you guys, it's kinda like you haven't been interested in doing any more restructuring of the securities portfolio. I was just curious if that mindset had changed at all, and if you thought maybe that might be a use of capital here at some point in the back half.
Dan Rollins (Chairman and CEO)
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 happened in the environment.
Speaker 15
We always try to take a look at the portfolio, at changing interest rates and do what's best for the balance sheet.
Dan Rollins (Chairman and CEO)
The team does a great job of tracking that and monitoring that for us.
Speaker 15
Yeah, they sure do.
Brett Rabatin (Managing Director and Head of Research)
Okay, great. Appreciate on the caller.
Dan Rollins (Chairman and CEO)
Thank you very much, bro.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Dan Rollins (Chairman and CEO)
All right. Thank you all again for your time for joining us today. I just want to repeat the four 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 result, 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.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.