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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and thank you for being with us. I will begin by introducing the members of the senior management team participating today. We have Chairman and Chief Executive Officer, Dan Rollins; Executive Vice Chairman, Paul Murphy; President, Chris Bagley; Chief Financial Officer, Valerie Toalson; and Chief Banking Officer, Hank Holmes.
Before the discussion begins, I'll remind you of certain forward-looking statements that may be made regarding the Company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks. Information concerning certain of these factors can be found in the legacy BancorpSouth 2020 annual report on Form 10-K. Also during the call, certain non-GAAP financial measures may be discussed regarding the Company's performance. If so, you can find the reconciliation of these measures in the appendix of the presentation as well as the Company's fourth quarter 2021 earnings release.
Our speakers will be referring to prepared slides during the discussion. You can find these slides by going to our Investor Relations page at ir.cadencebank.com where you'll find them on the link to the 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.
And now, I'll turn to Dan Rollins for his opening comments.
Good morning, everyone. Thank you for joining us today for the first consolidated earnings report for the new Cadence Bank, formerly known as BancorpSouth Bank. As you all know, we completed our merger with the former Cadence Bancorporation on October 29, 2021, and immediately changed our name to Cadence Bank.
Today, we will be discussing Cadence Bank's fourth quarter and full-year 2021 results. Paul and I will make a few comments this morning on our merger progress and our views on our company and the economic activity around our footprint. Valerie will discuss the financial results and updated purchase accounting disclosures, and Chris and Hank will cover our frontline efforts. After we conclude our prepared comments, our executive management team will be happy to answer questions.
Our slide deck this quarter has been expanded to include additional information, over and above our normal quarterly disclosures, in an effort to give our shareholders more insight into the new Cadence. We will reference certain slides in our remarks this morning, but we will not be covering them all.
It's obviously a very exciting time for our company. I hope you all saw our announcement yesterday unveiling the new Cadence Bank logo. We shared this news internally last Friday, which created considerable buzz around our company. While this project has taken many months and was led by our marketing and corporate communications teams, it's just the beginning of our journey as we strive to create a brand that reflects the combined cultures and values of two great companies. We will continue to unveil other parts of our brand identity in the coming months as we work towards full integration this fall.
Our operational and support teams, led by our executive steering committee, continue to make tremendous progress in our conversion planning and implementation. We have a number of integration activities that are already taking place across the company. For example, effective back in December, all new mortgage loan applications for the combined company began flowing through one consolidated systems. This is just one of many examples of smaller conversion projects that are occurring across the company prior to our main core conversion, which is still on track for this fall.
Our operational support teams have done a tremendous job of continuing to adequately support our frontline teammates while working through the conversion planning process. I would also like to recognize the efforts of our accounting and finance teams. Over the past few weeks, they've worked very hard in order to be able to provide our consolidated financial information. Closing late in the year certainly created a time crunch, and I personally appreciate their efforts on our behalf.
Finally, I'll conclude my opening remarks by briefly mentioning our business development and frontline efforts. Paul, Chris and Hank will provide more detail and color, but our results for the fourth quarter and for the full-year speak for themselves. With the exception of industry headwinds associated with mortgage, our fee income business units produced record results in 2021. The successes of our banking relationship managers also stand out, particularly in the fourth quarter.
With that, I'll turn to Paul for his comments. Paul?
Thanks, Dan, and good morning to everyone joining us. When I look at new Cadence Bank today, there really is a lot to like. I've been a banker for 40 years and from a shareholders' perspective, I think new Cadence Bank is the best bank I have ever been part of. First, we are in some very attractive markets. Unlike our nine-state footprint, and unlike the outlook for economic and job growth in our markets, we have a diverse revenue stream and numerous complementary business units.
For the full-year 2021, our 32% non-interest income number is a pretty good number. Our 62% efficiency ratio should improve as the conversion is completed and growth resumes. I look at our mortgage team, it's really pretty impressive. First, they run a tight shift. We have roughly 200 mortgage loan originators. We have a financial literacy training initiative throughout the footprint that's focused on helping first-time homebuyers. By training and qualifying more people, our team is increasing the size of the market for low to moderate income census tracts and in majority-minority neighborhoods. This is an initiative that we are all very proud of.
Looking at the 145-year-old legacy BancorpSouth Community Bank hits a major strength. These teams are deeply ingrained in their communities, and this business brings a steady source of diverse revenue and profit to the table each year. Legacy Cadence C&I model is a nice complement to the Community Bank, and over time, we will see meaningful synergies. I am looking forward to getting the conversion done and having one brand throughout the footprint. Clients will be pleased. More branches means more convenience.
Just last week, I had breakfast with a prospect who lives in Texarkana. He would not have considered us previously. Now with local branches, our chances are good. When I look at our $22 billion in assets under management and our wealth management platform, we see much opportunity for continued growth there. Our client retention rates in this business are best-in-class. Bank referrals have been and will be a meaningful part of the growth in revenue and profitability of this business.
The 140-year-old insurance business is impressive. Chris is going to tell you more about that in a minute, but it is a consistent provider of attractive revenue and profitability. One of my jobs is to see the referrals from our bankers increase, and they should because the insurance team is very experienced and good at what they do.
Our combined operations team is extremely capable. Putting the two companies together is a plus for long-term talent retention. Our operations backbone in Tupelo is strong, and our go-forward plan is enhanced by having meaningful presence in Birmingham and several other important satellite locations. Perhaps most importantly of all is credit. And I will say I'm really impressed with our results this year. We came through COVID with flying colors. The credit culture is mature, and we did well in the most significant stress test ever taken.
In 2021, legacy Cade credit improved significantly, including a number of large payoffs and recoveries late in the year. These serve to reduce the preliminary mark significantly. So closing day marks are much less than preliminary marks due to positive credit results all year long. This difference increases tangible book value materially relative to preliminary expectations. So our healthy capital ratios and liquidity ratios give us confidence to increase our dividend and to continue the share buyback program.
In the past, operating a bank I've often worried about being too small years ago. What if a hurricane hit Houston, it would impact a significant portion of our customers in our operations center. As we grew, this was less of the concern. But even at $18 billion, we had concentration issues that were a hindrance. Today, the diverse revenue stream and the granular profile of the new Cadence is very comforting. Today, we have room to grow all business lines.
I feel very fortunate to report that we have higher retention of key bankers from both legacy organizations. Our cultures are similar. We have very little overlap geographically or in business lines, and the reality is our bankers truly have more opportunity now than ever before. We value our teammates, and we are constantly working on ways to continue to be a great place to work. I never take that for granted.
Last, the senior management team is working well together. We all like and respect each other. Maybe I shouldn't put words in their mouth. I like and respect them. I guess you can ask them later if they like me. But I can tell you that we are all adjusting to our new roles. And as a reminder, the senior management team, we all have a material portion of our net worth invested in this company, and we are pulling together as a cohesive team. In the years ahead, we have a significant opportunity to build on the strengths that we've mentioned, and I can assure you our team is determined to do so.
I'll now turn it over to Valerie.
Thank you, Paul. The merger admittedly makes the results a little complicated to unwrap, but at a high level, I see three key highlights for the quarter. First and foremost, we've completed the merger of BancorpSouth and Cadence Bancorporation, and we are now combined and well positioned as we enter into 2022.
Second, our credit quality continued to improve notably, with significant declines in our combined non-performing loans and classified assets, net recoveries for the quarter and a lower credit mark on the acquired portfolios. Finally, we experienced meaningful organic loan growth in the quarter, and pipelines are robust. This growth combined with an asset-sensitive balance sheet, positions us well as we enter into what is expected to be a period of rising rates.
Turning to the quarter's results. Slide 5 provides a view of our summary income statement on both an annual and a quarterly basis. I will focus my comments this morning specifically on our fourth quarter results. And just as a reminder, with the October 29 closing of the merger, these results include a full quarter of legacy BancorpSouth activity and only two months of legacy Cadence activity.
Given the impact of day one provisioning and other merger-related items, we reported a net loss on a GAAP basis for the quarter of $37 million or $0.22 per share. On an adjusted basis, which excludes the day one provisioning, merger-related expenses and other adjustments, our fourth quarter adjusted net income available to common shareholders was $102 million or $0.62 per share.
Adjusted pretax pre-provision net revenue, or PPNR, was $134 million or 1.29% of average assets. While PPNR as a percent of assets was flat compared to the prior quarter, it included the impact of seasonally lower insurance revenues and declines in mortgage revenue. With that said, we are very pleased with our performance from a PPNR standpoint relative to our expectations for the quarter.
A little bit more on the adjusted items. $132.1 million of the $133.6 million provision for credit losses in the quarter was the day one provision on acquired loans and unfunded commitments, commonly referred to as a CECL double count. Fourth quarter merger and incremental merger-related expenses totaled $49.5 million. Merger expenses reflected as a separate line item on the income statement were $44.8 million and represent one-time costs to complete the merger that have no future benefit to the company, primarily advisory and legal fees and certain compensation-related items.
Incremental merger-related expenses represent costs to complete the merger for which the company received some future benefit and are included in the individual expense category line items. These were $4.7 million in the quarter and represented primarily merger-related employee retention costs.
Slide 6 of the presentation contains some highlights on our net interest margin as well as the asset sensitivity of the combined company. We reported a net interest margin of 2.9% for the fourth quarter, up primarily due to the increased accretion revenue from the merger. Fourth quarter net interest income included $16.4 million in accretion income, which added about 18 basis points due to reported margin. The yield on loans and leases for the fourth quarter was 4.34% in total and 4.06%, excluding the accretion income.
The relative size of the legacy Cadence variable rate C&I portfolio was primarily responsible for the decline in the reported loan yield, but it also serves to increase the asset sensitivity of the combined company that I'll speak to in a moment. The lower funding cost of legacy Cadence also contributed to the decline in total cost of deposits to 17 basis points for the fourth quarter. And we do believe we have additional opportunity to manage those costs down in our public fund and time deposit portfolios.
Turning to asset sensitivity of the combined company at year-end. About two-thirds of our loan portfolio is variable or floating rate with approximately 37% of total loans floating, meaning they reprice on a monthly basis or less. Our internal outcome modeling process reflects an increase in net interest income of about 3% over a 12-month period in a plus-100 basis point shock scenario. Note that of our organic loan growth this quarter, nearly two-thirds of it was C&I-driven, which will add to the asset sensitivity of the balance sheet over time.
I'll refer to you to Slide 7 and 8 in the presentation for additional color on our non-interest revenue and non-interest expense. On these slides, we've combined the historical results of each legacy company for prior quarters in an effort to provide some additional context around the combined earnings strength and the expense base of the new Cadence.
The last topic I'd like to cover this morning is provisional purchase accounting marks and valuation. Slides 15 through 17 in the appendix to the presentation contains summary schedules and disclosures. I'll first touch on the key non-credit related items and then come back to the loan mark.
We recorded goodwill of $452 million in conjunction with the merger, which is a result of the purchase price and the net fair value of the remainder of the balance sheet. The preliminary intangible asset value is recorded at $152 million, which includes a little over $100 million in core deposit and customer relationship intangibles, both of which are amortized over a 10-year period using an accelerated method. It also includes about $50 million associated with trademarks that are not amortized.
Finally, Slide 17 provides the detailed components of the provisional loan mark of $147 million or 1.3%, which includes both the credit and the interest rate components. The credit-related component of the mark came in at 1.6% of the acquired balances, again, reflecting the meaningful improvement in credit we noted earlier, with about 40% of the mark related PCD, purchase credit deteriorated loans, and 60% related to non-PCD loans. The initial allowance for PCD loans was established at $65 million with the amount netted through goodwill.
As mentioned previously, the non-PCD day one allowance was established through the fourth quarter loan provision of $119 million for loans and $13 million for unfunded commitments. I would again just remind you that all of the purchase accounting items are provisional as we continue to work through and validate our assumptions.
Now I have your head spinning with some of this purchase accounting, I'll turn it over to Chris for a little bit more on our business activities.
Thanks, Valerie. Good morning, everyone. Slide 9 is a graphical presentation of the loan portfolio at year-end compared to both the third quarter of 2021 and the fourth quarter of 2020. As presented, historical data is on a combined basis for both legacy institutions for comparison purposes. Year-over-year comparisons are skewed due to the combined PPP loans totaling $1.9 billion from year-end 2020, with only $50 million remaining at year-end 2021.
When we look at the fourth quarter activity, we reported net combined organic loan growth of $400 million or 6% annualized on a combined basis. There was a slight decline in our CAD balances, but otherwise, the growth for the quarter was spread fairly evenly across each of the respective loan categories and business lines.
We are very pleased to be able to have continued positive loan growth in a quarter when we merged the two companies. This is a testament to the bank's focus on customers and relationships and the excellent talent we have across the company, keeping the business moving as usual, even while we plan and execute on integration.
Slide 10 of the presentation reflects similar data for our deposit base. The year-over-year combined bank comparisons clearly show the impact respect to the unprecedented liquidity in the system. A couple of points to note as we look specifically at the fourth quarter.
The pre-announced divestiture of the seven-bank branches resulted in a $417 million decline in legacy Cadence deposits. When adjusting for this divestiture, deposits declined approximately $470 million on an organic basis during the quarter, driven by routine volatility in some of our large municipal deposit accounts. Other than these factors, our deposit base remained stable, and the combined company will benefit long-term from the core funding in our Community Bank franchise.
Moving to credit quality. Slide 11 contains a summary of several key credit metrics and highlights. The purchase accounting considerations are obviously a big piece of the credit story for the quarter. Valerie has already touched on that. In addition to the previously discussed provision, we reported net recoveries of $4.8 million or 8 basis points of net loans and leases annualized for the quarter, which marks the third consecutive quarter of reported net recovery.
On a combined basis, the bank's non-performing loans declined to $38.4 million or 20% during the quarter, bringing period-end NPLs to net loans and leases to 57 basis points. Combined, non-performing assets declined $42.3 million or 18% during the quarter, with period-end NPAs to total assets at 39 basis points. Non-performing assets as a percentage of total assets have declined from 55 basis points of total assets to 39 basis points of total assets year-over-year. Additionally, on a combined basis, classified assets declined 15% in the fourth quarter and nearly 40% in the past year. This credit story is a good one and one of continued improvement.
Slide 18 provides a five-quarter look at our results for our insurance and mortgage products. Insurance reported total commission revenue of $32.6 million. And while the fourth quarter is the seasonally adjusted lowest revenue quarter from a policy renewal cycle standpoint, this is now the third consecutive quarter that we've reported near double-digit revenue growth on a percentage basis compared to the comparable quarter of the prior year.
Mortgage reported origination volume of $818 million for the quarter, with two-thirds of this being purchase money. Pipeline declined compared to September 30, which is consistent with annual seasonal trends in home prices activity, as well as we view the impact of increasing long-term rates. However, we are excited about the addition of some very strong housing markets in Georgia and Florida to our footprint in connection with the merger.
I should also mention our wealth and trust revenue for the quarter of $16.4 million, reflecting the addition of Linscomb & Williams and the legacy Cadence Trust and Investment Services. We are very excited about the addition of these quality fee businesses to our wealth product mix.
I will turn the call over to Hank for some comments on the commercial side of the bank. But before I do, yes, Paul, we like you.
Thanks, Chris. As previously mentioned, we are seeing a meaningful resurgence of organic loan growth with a number of nice wins on the commercial side of the bank, supported by continued good volumes in our loan approval pipeline. About two-thirds of the organic growth this quarter was driven by broad-based growth in our C&I, CRE, mortgage and consumer buckets. We have good pipelines, and originations in construction and development loans will provide a nice tailwind for growth in 2022 as these construction loans fund over time.
As we turn our focus to 2022, we are seeing balanced opportunities with regards to loan growth throughout our footprint and within our specialty lending groups. I would anticipate a combined portfolio growth rate in the mid-single digits and would suggest it's a nice feeling to see growth resuming.
As we've said in the past, we are very proud of the team we have in place, and I'm very pleased with our ability to retain such highly experienced competitive bankers as well as our ability to hire and attract new talent across our footprint.
A great example is the addition of our Orlando C&I team. We were able to hire a very talented group of bankers, and I'm pleased to report they have hit the ground running and are off to a great start. We also recently added a community banking team in Fort Worth and are actively seeking additional markets within our footprint to drive revenue growth in future quarters.
In summary, our teams are working well together, actively calling and leveraging our expanded product base as we bring our two organizations together. I am very pleased with the progress we have made on the merger, and I'm optimistic about Cadence in 2022.
Operator, our team is now ready to answer any questions.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Rose with Raymond James. Please go ahead.
Hey. Good morning, everyone. Thanks for taking my questions.
Good morning, Mike.
Good morning. Just wanted to go back to the original merger assumptions. Clearly, a lot has changed, and that's reflected in some of the day one marks. You guys have talked about 17% EPS accretion, I think 14% if 75% of the cost savings have changed. But obviously, there's been a lot of changes since mid-April when this was announced. So can you give us any sort of updates for accretion expectations, timing of cost saves any other model inputs that may have changed from – more materially from mid-April? Thanks.
Yes, I'll take a stab at that right off of what everybody may want to jump in. When you talk about cost saves, I think we still feel confident that we're on track with what we had planned all along. I think when we look at the timing of all of that, we're still on for 4Q operational integration. That means that those cost saves will – we will be carrying that cost through most of this year. And in the last quarter of this year, costs will continue – will begin to drop off in a big way. So as we start 2023, we should really be in pretty good shape. Valerie can answer a lot more of that than I can. So Valerie, go ahead.
Yes. Hi, Michael. No, I think Dan said it as well, we're really focused on that total expense phase capture for 2023. And as Dan mentioned, with the fourth quarter conversion, that pace is going to be less in the earlier part of 2022 and then more, obviously, once we get through that conversion.
But that was a part of our original plan.
Yes, it was, although the dollar amount that we get in 2022, I think will be less than what we actually get in April, simply because of the timing of that conversion. On the accretion standpoint, we are looking when you look out in 2022 kind of for the entire company on an updated accretion estimate. That's going to be closer to about a $40 million number. Now that includes the Cadence acquisition as well as the prior acquisitions and doesn't assume any prepaid type of activity on the Cadence portfolio. So as you know, can vary materially from that, but that's really what the new numbers are shaking out to look like.
Okay. That's helpful. And then maybe as a follow-up, it looks like the purchase accounting accretion in this quarter was a little elevated. If I'm reading the press release right, it looks like you got about $78 million remaining. Any sort of way that we should be thinking about just the way the accretion income flows in over the next couple of quarters? I assume it's going to be lower just given that $78 million base. Thanks.
Yes. I think if you look at the $40 million that I spoke to in 2022, it will actually be fairly balanced in the first three quarters and a little bit less in the fourth quarter. And again, that doesn't reflect any prepayments of any quarter.
Perfect. And maybe finally for me. So big buyback announced. Last month, they're at least bigger than I think where the Street was modeling. Can you just talk about how you guys think at this point about intrinsic value? It looks like your stock is around 10x forward numbers and a little bit more expensive on tangible, but it does seem like a good tool here. Can you just talk about the thoughts around the buyback and that size and how it came to be? Thanks.
Yes, I think we've looked – I think size-wise, it's probably not that far as a percent of shares outstanding as we've had in years past. So when you're looking at shares outstanding, it's a similar case as we've had in years past. And I think our plan has really not changed, Michael. I think we want to take advantage of the market when the market gives us advantages. We want to make sure our 10b5-1 plan is ready to execute when the market backs up on us, and we want to take advantage of all the tools that we have for capital management. You're right, the 10x forward earnings, I think we all agree, those of us that all own shares, which everyone in this room does in a big way, I think that's low. The increase in tangible book value that we saw with the merger in this quarter helps us on that front too per share.
Very helpful. Thanks for taking my questions.
Thanks. Good to hear from you.
The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Hey, thanks. Good morning, everyone.
Good morning, Jon.
Maybe one quick follow-up on expenses. Valerie, what's kind of your near-term – what would you give us for a starting point on Q1 expenses? And I understand the step down in Q4, but how would you guide us on the pace of expenses or what we should expect between now and Q4 for the convert?
Yes. So one thing, when you're looking at the fourth quarter numbers, keep in mind that there's only two months of Cadence in those numbers. So you've got to try to normalize for that. The other thing that I would encourage you to think about in the first quarter is there's all the FICA tax, there's the 401(k) match, there's all of those things that typically bump up expenses a little bit in the first quarter. And on the basics, you'll kind of see the reflection of all of that. But beyond that, not a whole lot of change in the first quarter. But as we continue to work toward merging, integrating, identifying efficiencies that is going to be the trend as we work through 2022.
Does that help you?
Yes, it helps. But I guess I'm curious, you're not seeing any kind of material expense pressures now on the conversion? Is that fair?
What do you mean by expense pressures?
Anything unusual other than the compensation-related items that I spoke to? Is that…
Yes, exactly. I mean can we…
Oh, yes. We're fairly feeling wage pressure. The whole world is feeling wage pressure. So we're clearly feeling wage pressure. But I think when we look at what's out there today, we're spending money on the integration. The tech team is focused on making sure we've got quality technology behind us. We're actively looking to make sure that we've got our cost saves in the pipeline coming through. I think we're not far off of where we were when we talked about this over the last six months.
Yes. I would say that we do anticipate merger-related expenses to continue throughout the year. And so you'll see us capturing those and identifying those for you separately.
Yes. The reason I ask is it seems like your revenue environment looks pretty good. I'm just trying to get a gauge on expenses. In terms of the margin, anything you want to do differently from an asset sensitivity perspective? Are you thinking about putting some cash to work? Or is it just you feel comfortable with the status quo, what you have today?
Yes. So we put a lot of cash to work in the fourth quarter. Now you don't see that necessarily as a full quarter result because it was throughout the fourth quarter. They're pretty short-term assets. So it's pretty low, but it's certainly better than zero. I will say when you start thinking about the margins, the net loan growth is certainly opportunistic. We're not looking to build the securities book beyond where it is today. In fact, some of that runoff cash flow could actually help fund some of those loans. And obviously, that's NIM supportive.
The other thing I would say is our deposit cost, while they've come down notably, do tend to be higher than some of our peers. And so there is opportunity there as rates go up to be able to lag those deposit costs. And so in the release, we talked about an asset sensitivity plus 100 of just shy of 3%. If we're able to lag those deposit costs 50%, we anticipate that, that plus 100 shock number could actually more than double. So there's definitely opportunity there that we're going to be looking more at.
That's helpful. I'll step out of the queue. But congrats on getting this all closed together.
Thanks, Jon. Appreciate your support.
Our next question comes from Catherine Mealor with KBW. Please go ahead.
Thanks. Good morning.
Hey. Good morning, Catherine.
Valerie, you mentioned that you already put some of your cash to work in the fourth quarter, and you noted some of what you did was very short-term in nature. So is there a way to think about how quickly your security portfolio more cash flow and be able to be reinvested once we get to a higher rate environment in the next couple of quarters? And maybe what that reinvestment does?
[Indiscernible] portfolio?
Yes. And how that's going to impact also that 3% NII guided 100 basis point up scenario, it feels like as that buying book is reinvested, that's really a big opportunity for you all. Just any kind of color you can give us on that would be awesome?
Yes, absolutely. There's a – between three and a half and four-year duration on the portfolio. But of course, there's a lot of cash flow on that, that comes through every quarter. I'm not sure I have the updated numbers, but I think it's well north of $0.5 billion in cash flow that comes off of that portfolio.
It's big number.
Yes. And so that absolutely will certainly help. That is factored into some of these NII numbers. But what's not factored in is, as I mentioned, is if we're able to use some of that to help fund some of the loan growth, that may provide us a little bit more pickup as well.
And as we think about a starting point for the margin next quarter with the full quarter impact of Cadence, is – I mean you've got kind a few moving parts, right? You've got a full quarter impact of the lower loan yield, but then you look like you put some of the liquidity to work. Did you think net your core margin falls further in the fourth quarter or the first quarter? Or do you think actually we've already hit a bottom and that’ll start to move higher next quarter?
Remember, most of the investments that we're talking about came on really from late November through December. So you really only had a month of some of that cash deployed in the numbers, and Valerie is going to tag on to that with.
Yes. No, I mean, obviously, there are a lot of moving parts that can go different directions. But we do feel pretty good that we've probably hit a bottom for our margin. And so I think that's both positive for 2022.
And beyond.
And beyond.
Great. Very helpful. Thank you.
Thanks, Catherine.
Our next question comes from Brad Milsaps with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning.
Valerie, I just wanted to follow-up on the deposit beta discussion. I was curious, what deposit beta are you guys using to drive the 2.8% increase in net interest income with 100 basis point move?
It's a 28% deposit beta. And that, again, is really based on historical behavior. Never in – I think either one of our histories have we had this low at the loan deposit ratio in this flush with our deposits and cash for the whole industry. And so that is why we speak to some optimism and being able to lag some of that on the way up, hopefully, more favorably than the beta that we've got built in.
Okay. Great. And then I know you addressed some of the assumptions back in April to now. One of them was, I think, just under a 15% ROTCE in 2022. Curious if that contemplated as much capital return as you guys could potentially have in terms of the share buyback? And if you still feel pretty good about that ROTCE target this year?
Yes, I don't think that we have any suggested significant revision to that estimate.
Okay. And then finally, I think initially, you outlined maybe $150-some-odd million of merger cost. I know you've taken maybe a third of those at Cadence today, some at legacy Cadence. Is that also still a pretty good estimate? Or do you think you can do better?
Yes. I think that one is going to be hard because some of that was incurred pre-closing on the Cadence side. I don't know whether we have that number for you. We will incur some significant merger cost over the back half of this year or the first three quarters of this year. Remember, the big number that was in this time was a lot of the closing cost – comp cost.
And advisory fees, legal fees.
The one-time cost, yes.
Yes.
Got it. So the remainder still to come? I think legacy Cade maybe took $14 million or so, maybe prior to closing, something like that. But – so those are still to come.
I think that's a reasonable expectation.
Okay, great. Thank you, guys.
Thank you, Brad. Appreciate it
The next question comes from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Hey. Good morning, everyone.
Good morning.
Dan, I just wanted to ask about, obviously, the focus is going to be on getting the conversion and getting the two companies working in lockstep. And so I would assume traditional bank deals are off the table – most likely over the balance of this year. And so I just wanted to check if 2023, is that something that you would return to look at? And then – but in the meantime, are there any business line deals, things you either don't have or you would want much more of that you would look for that you could do in the meantime? Thanks.
Sure. I appreciate that. I think that a couple of answers to that question. Yes, I think our operations team is very focused on putting together the two entities. I think you see some of that with unveiling yesterday of the new look. I think Hank, Chris and Paul and the rest of us are all really excited that we're able to produce the loan growth that we produced in the fourth quarter on top of completing the merger. And I think sometimes, we look back at the mergers and there aren't a whole lot that grow a lot in the quarter when a merger is completed. So I'm really proud of the team on that front.
We've got to stay focused on the core growth that this company can produce for you all. I think that the M&A activity, you never say never, but I don't see that as a high likelihood anytime soon on the bank side. But fee income side, we continue to look for opportunities on the insurance side. We continue to look for opportunities in other fee businesses that would complement what we're doing today.
One of the things we picked up with the merger was the payroll processing entity was a subsidiary of Cadence before. That entity is exciting for our insurance team, and that that's a product the insurance team was selling and pushing a third-party vendor for, and now we can move some of that inside. So there's opportunities for us to continue to find those fee business pieces. Now whether they show up at the front door or not this year, I don't know, but we certainly would be interested in looking at some of those because they don't impact the workflow and the process that the bank is focused on and consolidating together.
Okay. Great. Thanks, Dan. And just a quick follow-up. The ACL ratio, I know it was a noisy quarter with the day one provision. But now with that, I believe it's a 1.66x PPP. Just wondering what your feeling is on that. I would think that, that can still trend down if the credit environment keeps where it is, but what's the general outlook there?
The credit environment is very good. And I think when you look at the two standalone entities, I mean, showing net recoveries in the quarter is a positive multiple quarters of net recoveries. We continue to see problem assets decline. I think your assumptions are probably spot on. Valerie or Chris or Hank, anybody else want to jump in?
I think your observations are spot on.
Yes, I'd agree. A lot of moving parts. Loan growth could be a factor the other way. So I think we've got to look at all those every quarter like we always.
Okay. Thanks very much.
Thanks, Kevin. Appreciate it.
[Operator Instructions] Our next question comes from Matt Olney with Stephens. Please go ahead.
Hey. Thanks. Good morning, everybody.
Good morning, Matt.
My question is directed towards Valerie. I'm a little confused on the 100 basis point shock scenario that you mentioned. It's disclosed at the 2.8% on Slide 6, but you mentioned a scenario where it could be higher. Can you just repeat what that scenario is and what the assumptions are? Thanks.
Yes. So what I was speaking to there is included in that 2.8% is a deposit beta of 28%. And so if – given the industry significance on deposits, if the whole industry is able to lag and that we're able to lag and if we're able to cut that beta in half, that would more than double that asset sensitivity. So that's just – I was just sharing that as an illustration of the ability that we are going to be working toward within the year to hopefully improve that.
The liquidity in the market, everybody's deposit flush today. So I don't think anybody is going to be chasing deposit cost anytime soon. And the benefit of that should be a win for us.
The other thing that I would mention related to that asset sensitivity is if you look at this quarter's $400 million in organic loan growth, about two-thirds of that were C&I-related loans, but tend to be more variable floating rate loans. Over time, that will also serve to increase the overall asset sensitivity of the balance sheet.
And also on this topic, Valerie, you mentioned a percent of the loans that are floating? Can you speak to any floors, I guess, that would impede those – the float initially when the Fed raises rates?
Yes. We've got just over 25% of the portfolio that is on floors.
We've got to have a rate hike but with no change for those.
Yes. And the average in the floor amount is just around 40 basis points. So it will take a little bit of a rate hike movement before those loans specifically start to reprice.
And just to clarify, that 25% of the floating rate loans or of the variable rate loan?
That is 25% of the total loans.
Total portfolio.
Total loans. Got it. And then on Slide 10, there was a mention of some deposit outflows from some routine volatility of municipal accounts. Any more color on this? And should we think about this as seasonal? We could see this come back at some point?
So I think when you're looking at deposit flows from a municipality standpoint, Texas at year end, you can see a lot of money moving in the fourth quarter and the first quarter. So yes, I think you'll continue to see some swings in the deposits quarter-to-quarter, and that is seasonal when you're looking at municipal deposits.
Okay. And then just lastly, any color on the – what we should be assuming for the tax rate of the combined company into 2022?
Yes. We're looking at an estimated rate for 2022 of between 23% and 23.5%.
Okay. Thanks guys.
I appreciate it very much.
This concludes the question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks.
All right. Thank you very much. In closing, what an exciting time it is to be a part of the new Cadence Bank. Our new logo unveiled yesterday is the first step in 2022 of our rebranding initiative and provides our company the opportunity to tell our story across our footprint. We are also pleased to be able to reward our shareholders with an increased dividend for 2022. As we move further into 2022, we continue to strive daily to grow our company and to capitalize on the opportunities this merger provides to improve financial performance for our shareholders. As we just mentioned earlier, our insurance team had a record year, and they look to continue to capitalize on the firm premium markets that the industry is experiencing.
Our non-interest revenue business units, mortgage, wealth management, treasury management are excited about the opportunities ahead of them as they take advantage of the cross-selling opportunities presented by our merger. From a business development standpoint, our relationship managers, both in the Community Bank and our commercial units, look to continue the momentum that's reflected in our fourth quarter organic growth results.
Finally, our operational support teams will maintain their focus on our operational integration and execution as well as our efficiency initiatives as we look to capitalize on the cost savings associated with the merger. I think I speak for our entire Board of Directors and our management team when I say we are truly excited about what lies ahead for us for the new Cadence and the opportunity that we have to continue to build shareholder value both legacy institutions have achieved in the past.
Adding on to Paul's comments, I've been a banker for over 40 years, and I can't remember a time in my career when I was more excited about the opportunities in front of us. Strong markets with dedicated teammates and quality products provide our company with a very bright future. Thank you all for joining us today. If you have additional questions, please feel free to reach out to us. Thank you very much for your time.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.