Cadence Bank
NYSE:CADE
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Cadence Bank
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00:00 Good morning, and thank you for joining the Cadence Bank First Quarter 2022 Earnings Conference Call. We have our Executive Management team here with us this morning, Dan, Paul, Chris, Valerie and Hank. 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 as the exhibit to the 8-K that we filed yesterday afternoon. These slides are also in the Presentation section of our Investor Relations website.
00:39 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 this morning.
00:50 And now I'll turn to Dan Rollins for his opening comments.
00:55 Good morning, everyone. Thank you for joining us today to discuss Cadence Bank's first quarter 2022 financial results. Paul and I will cover a few highlights this morning as well as provide an update on our integration efforts. Valerie will discuss the financial results in more detail. Chris and Hank will provide some additional color on our frontline efforts. And after we conclude our prepared comments, our Executive Management team will be happy to answer questions.
01:19 It is an interesting time in our industry, given the economic trends, including the rate environment and inflationary pressures as well as the political instability overseas. We are frequently asked questions about how these dynamics are impacting our business as well as our customers. While we are watchful for the possible impacts of these issues, I'm pleased with the strength and stability of our footprint and specifically our customers. We continue to be pleased with our fundamental operating performance, including our growth efforts.
01:50 We reported net income available to common shareholders for the quarter of $112.6 million or $0.60 per diluted share and adjusted net income available to common shareholders of $121.6 million or $0.65 per diluted common share. The only material non-operating item this quarter was just over $10 million in merger-related expenses. Importantly, credit quality continues to be a bright spot for us. We reported net recoveries of $400,000 for the quarter, which marks the fourth consecutive quarter we've been able to post net recoveries.
02:24 We also reported a 22% decline in non-performing loans and leases during the quarter from an already relatively low position. From a balance sheet perspective, we reported net organic loan growth of over $300 million or 4.6% annualized and total deposit and customer repo growth of over $750 million or 7.7% annualized. Our loan growth this quarter was primarily within our C&I portfolio, while the deposit growth, which has historically been seasonally high in the first quarter was primarily driven by growth in non-interest DDA balances, which is a positive for us.
02:59 From a capital management perspective, we repurchased just over 5 million shares during the quarter, and our board increased the common dividend to $0.22 per share per quarter, marking the 10th consecutive year of dividend increases. I believe both of these actions demonstrate our Board and management team's confidence in the future of the New Cadence Bank.
03:18 Paul, I'll let you add some comments.
03:21 Thanks, Dan, and good morning to everyone. I continue to be very pleased with the progress we're making, the benefits of our merger from our customers, shareholders and teammate standpoint, all feel very positive to me from talking to others around the industry, it feels like our cultural fit is probably ahead of where some of the other deals are. We're working well together and collaboration is very high. We've done extensive planning and testing for our conversion, which is in line with our original time frame, expecting to do our conversion in the early fourth quarter of this year.
03:55 We're seeing pretty positive growth for customers really throughout the footprint. Texas and Florida stood out this quarter from a community bank standpoint, and our corporate and specialty teams reported nice growth throughout the footprint.
04:07 As I spend time with our bankers, we're making a lot of calls. We're out knocking on doors. We've returned to the office. It's a bit of a hybrid model, but we're out looking for, of course, loans, deposits, but assets under management and more insurance business. We're doing a lot of blocking and tackling. And the key notion here is that core growth is a key driver of shareholder value, and we're very determined and focused on delivering that.
04:32 With that, I'll turn it over to Valerie.
04:34 Great. Thank you, Paul. Turning to this quarter's results. Slide four provides a view of our summary income statement. And just as a reminder, with the October 29th closing of our merger, the first quarter of 2022 is the first reporting period that we've had a full quarter of the combined results of both legacy Cadence and legacy BancorpSouth. I would also remind you that fourth quarter 2021 results were adversely impacted by the day one provision for credit losses and other merger related items.
05:02 For the first quarter, we reported GAAP net income for the quarter of $112.6 million or $0.60 per diluted share and adjusted net income of $121.6 million or $0.65 per diluted share. Adjusted pre-tax pre-provision net revenue or PPNR was $160 million or 1.36% of average assets. There are three key themes as you look at our results for the quarter. First, our continued loan growth has allowed us to grow net interest income and see positive movement in our margins. Second, our non-interest revenue businesses are performing very well. And third, credit quality continues to remain strong, supporting the lack of provision for credit losses for the quarter.
05:46 As shown on Slide five, we reported net interest income of $312 million and a net interest margin of 2.92% for the first quarter, up from 2.90% in the fourth quarter of 2021. Excluding the impact of accretion, the linked quarter net interest margin increased by 3 basis points. The yield of net loans, excluding accretion was 3.96% for the first quarter, down 10 basis points from the linked quarter, primarily due to the full quarterly impact of the legacy Cadence variable rate loan portfolio, C&I portfolio.
06:21 Similarly, the full quarter's merger impact drove our securities yields higher and funding costs lower, offsetting the decline in loan yield. Our total cost of deposits declined to 15 basis points in the quarter. As we look forward, our balance sheet is well positioned to benefit from rate increases with 69% of our loan portfolio floating or variable.
06:43 Slides six and seven provide some additional color on our non-interest revenue and non-interest expense. Included in non-interest revenue, the quarter's insurance commission revenue benefit from seasonality, a high retention rate and new customer wins. Mortgage banking revenue increased largely due to the impact of rising interest rates on our MSR assets. And as we look at our expenses for the quarter, first quarter is generally seasonally high as a result of resets of payroll taxes and 401(k) match as well as higher commissions led to seasonally higher insurance revenue.
07:17 Even so, the quarter's adjusted efficiency ratio was stable at 63.5%, and we continue to expect full realization of the merger efficiencies during 2023. While not related to the first quarter, we did announce an increase of our minimum wage to $18 per hour effective the beginning of April, as we continue to see wage pressure, particularly in some of our larger markets.
07:41 Before turning it over to Chris, I would like to touch briefly on the changes in tangible book value. Like many others in the industry, our tangible book value was impacted this quarter by the AOCI marks that are available for sale securities portfolio due to the rising rate environment. To help clarify the impact, we have disclosed tangible book value per share, both including AOCI and excluding it. Excluding AOCI, tangible book value per share of $19.29 actually increased during the quarter despite our active share repurchases. It is also important to remember what drove this quarter's change in AOCI as simply a change in fair valuation driven by interest rate changes, and this fair value adjustment does not impact our regulatory capital shows in any way.
08:26 I'll turn it over to Chris for a little more on our business activity. Chris?
08:32 Thanks, Valerie. Good morning, everyone. I would like to expand on the three key highlights for the quarter mentioned by Valerie, loan growth, credit quality, and non-interest revenue growth. As reflected on Slide eight, we reported net organic loan growth for the quarter of just over $300 million or 4.6% annualized, coming primarily in our C&I book. Hank will make some additional comments on the loan growth efforts in a moment. But as Paul mentioned, we saw a nice growth in our Texas and Florida markets within the community bank and across our footprint in the corporate banking and specialty lending units.
09:04 Credit quality continues to be a positive story for us, which is highlighted on Slide 10. As Dan mentioned, we reported net recoveries of $400,000 for the quarter, which marks the fourth consecutive quarter of reported net recoveries. Our total non-performing loans declined $34.5 million or 22% during the quarter, bringing period-end NPLs to net loans and leases to 44 basis points, while non-performing assets also experienced a similar decline.
09:32 Non-interest revenue, which is highlighted on Slide 13, thus insurance having a nice quarter and reporting total commission revenue, up $36 million for the quarter or 17% for the first quarter of last year. Growth came primarily in our property and casualty portfolio as retention rates remain high and as we also picked up some nice customer wins. Mortgage reported origination volume of $804 million for the quarter with just over 70% being purchased. While we are pleased with production volume, rising rates do pressure our gain on sale margin, which is 1.24% for the first quarter.
10:07 Finally, I'd like to highlight our Wealth and Trust teams, which reported revenue for the quarter of $21.7 million. I'd also like to highlight that this revenue number is up from $8.4 million for the same quarter of '21 and reflects the contribution of the legacy CADE trust and wealth services and the Linscomb & Williams results. We're really excited about the synergies the combined companies bring to our non-interest revenue lines and the future benefits from the cross-selling opportunities, additional scale and market diversification created by the merger.
10:36 I will turn the call over to Hank for some comments on the corporate side of the bank. Hank?
10:43 Thank you, Chris. I was pleased to see that commercial loan growth in the quarter was spread throughout the corporate C&I teams across the footprint. Our bankers have been leveraging the expanded platform and bringing in more wins as the economy stabilized post-COVID. Specialized lending and renewable energy teams have been quite active, other areas are seeing payoff slow, and we have the teams in place to continue growth.
11:06 I am feeling positive about the growth this year as pipelines remain healthy. In particular, our technology, healthcare and C&I groups are seeing attractive opportunities in our combined markets and throughout the footprint. We are adding good CRE projects from our community bank and corporate CRE teams, primarily in multi-family housing.
11:25 Construction loans continue to fund, but we are still seeing lower utilization. Given the volatility in long-term interest rates, we do anticipate utilization in our construction portfolio to increase over the next 12 to 24 months to more normal or historical levels. Our focus on credit continues to be disciplined. We are not competing at higher leverage points with non-banks on EV loans. The markets continue to be competitive, but the pressure on terms and pricing seems to have settled some. Our teams have come together nicely, and I'm encouraged by the enthusiasm and commitment. I'm also an optimist and excited about many great successes to come for our organization.
11:57 Operator, our team is now ready to answer any questions.
12:02 We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.
12:30 Hey, thanks. Good morning, everyone.
12:32 Hey, Jon.
12:34 You talked a little bit about overall growth expectations for the company. I saw you put up $300 million in organic growth. And just there's a lot of churn between the two companies, I would guess, but just talk a little bit about your expectations? And is that a reasonable pace? Or do you expect that, that can accelerate a bit?
12:52 I'll let everybody jump in on that. There's lots of activity going on, on the growth side of the house. There has been some churn. We continue to see payoffs on CRE flow-through. There's just a lot of activity. Pipelines are also big. So Hank and Chris, you guys are driving some of that to add in.
13:13 Hey Jon, appreciate the question. So as I mentioned earlier, it's a lot of balanced growth. The pipelines continue to be strong, in my opinion. And I think that with some of the areas like in our renewable energy and certainly the energy component of our bank with prices where they are, some opportunities there. And the C&I teams are just getting a lot of looks. And so the activity is high. Chris, do you want to add something to that?
13:39 Yes, just with rates trending up, that's probably going to slow down some of the churn, especially on a community bank, refinance side. But -- it also could impact maybe opportunities as folks are looking at higher interest rates on their projects until that factors in. So how is that right down the middle of the fairway for you?
13:57 We have some pretty significant unfunded construction lines out there.
14:00 Right. We did.
14:02 So yes, there's some activity going on, Jon. We're excited about what the team has been able to do in light of all the changes that we keep throwing out.
14:10 Okay. So it feels good, maybe a little bit better is a good summary?
14:13 I think, we feel excited about the opportunities.
14:16 Okay. Plenty of other place I could go, but just as long as we're on this topic, Hank, you talked about the competitive environment being settled some. And I think that's somewhat encouraging others have said it's ultra competitive. But can you give us a little bit more in terms of examples of what you're seeing there?
14:31 Sure. It's -- we're always -- we're in a competitive business and it's always competitive. So where I see some slowdown is, we obviously, in CRE, we saw rates fall dramatically over the last 24 months. That seems to have settled down. We're not chasing terms and leverage points on EV and other areas that we compete in are modest or where I would say historically, we're not chasing at this point. So I feel pretty good about where we are from the terms and pricing, but it is competitive.
15:05 A lot that covered there, and bring the two companies together, there's a lot more emphasis or just the market and type of customer base on the CRE side for legacy CADE. That's floating rate, so that's a nice pickup for us, especially in the rate environment we're moving into. We are still seeing in the community bank markets, upward pressure on rates there, everybody hold it. It's still pretty competitive out there, recently as last month, we saw some three handles, but now you're seeing all that move into the four, kind of a four handle side, not as many three handles. So good upward pressure on the right field as well.
15:41 Okay. All right. Thanks. Appreciate it.
15:44 Thanks, Jon.
15:47 The next question is from Catherine Mealor of KBW. Please go ahead.
15:53 Thanks. Good morning. Just want to say on the loan conversation and talk about loan yields. And maybe it's for Valerie. Just kind of walk us through, you mentioned 69% of your loan book is floating or variable. Can you just walk us through to remind us what percentage now today is floating immediately? And once we get past, let's just say we get 50 bps in May, so then we're kind of three rate hikes through, how much you're kind of coming off the floors? And then the -- kind of the timeline on the remaining variable piece of the portfolio, just to kind of get a sense as to how quickly we should see these loan yields move higher. Thanks.
16:32 Yes, absolutely. Thanks, Catherine, for the questions. Great questions. Back -- last quarter, we said that it would take about 40 basis points movement in order to get our loans in average off the floors the $7.5 billion or so that we had on the floors. Well, we've had a whole lot of that movement actually in the market take place already. And so the next movement will definitely get those off their floors. We do have about $7.6 billion of our loan portfolio is actually floating. And so that's less than 30 days and so 28% of that book.
17:09 When you look at the total book, we've got about 50% of our entire portfolio that will reprice over the next year. And so that gives you a little bit better timing on some of that, with most of that actually coming in the next three month period. And so again, that positions us really nicely as we look at some of the increases that we expect coming down the road.
17:34 When you take a look at some of the portfolio, we are starting to see the impact of some of the rate increases on some of the renewals come through as not only renewals, but also loans that are simply just repricing, starting to see that come through, and we'll definitely see that impact more in the second quarter. New loans on average are coming on around the 360 level, but again, about two-thirds of those are variable rate. And so those will continue to move. Does that help, what you were looking for?
18:09 Yes, that's super helpful. Thank you. And then my next question is on the expenses. So I fully appreciate that this quarter is elevated, because it's a 1Q elevation and then we don't have the full impact of the cost savings in. Is there -- can you just kind of help us take a step back big picture maybe what's a good quarterly run rate we should get to kind of by the end of the year once we have the cost savings fully baked in? Or any kind of guidance you could give us on where you think the expense run rate is going just to make sure we're all on the same page. Thanks.
18:42 I remember, we're on a 4Q integration plan. And so I don't know that we'll have a good clean run rate in 4Q. So I would put that out there first. I think we expect 1Q to be fully baked in, as we get into 4Q and we're -- as Paul said, we're on schedule, we're on task, we've actually completed two huge hurdles just in the last 1.5 months, working towards our full integration. But you're right, 1Q expense run is high. There's lots of things that are in there just naturally. And then when you look at the things we were doing through the merger, I feel pretty confident that we're on our run rate to exceed -- meet or exceed the numbers that we put out there. Valerie has been looking at numbers up while I've been talking.
19:26 Yes. I think what might help, I know that the first quarter has a lot of noise and of course, the fourth quarter was very noisy given the timing of the merger date. Last quarter, we disclosed our combined third quarter F '21 expenses. And on an adjusted basis, that was $277 million, compared to the first quarter adjusted expenses of $281 million. But as we talked about, this first quarter did have the resets of the 401(k) match and the payroll taxes.
20:00 And so if you normalize that, and then we also had a bonus that we provided to a number of our employees for inflationary purposes in the first quarter. That amounted about $2.8 million. So when you combine all of that together, effectively, third quarter '21 to first quarter '21, expenses actually came down about $7.4 million. And so that will give you a little bit of a sense of some of the initial incremental merger cost saves that we're starting to see kind of in the underlying foundation.
20:35 That being said, it's going to be bumpy until we get through this conversion. We do have -- we talked about we did increase our hourly wage to $18 per hour. We also have our merit increases in the July 1 time period. And so all that will be a little bit bumpy until we do get finished with the conversion. But of course, none of this includes savings from any branch efficiencies -- and then certainly, some of the savings that we know will come after we are running on one operating system.
21:10 The wage pressure is still big. And so Valerie hit two topics there. You want to make sure we cover again. So we did change our incoming wage minimum to $18 an hour on April 1. That's a pretty big run rate. That's going to be close to $10 million on an annual run to plug that in. And then our normal merit cycle for everyone that wasn't in that group hits on July 1. So we will see some upward pressure on comp, even excluding the savings and the drop-offs that are there, we are seeing, you saw headcount drop in the quarter, and we continue to see some of that. But as Valerie said, it's going to be bumpy as we move down the path.
21:55 Great. That's clear. Appreciate that, and it's very helpful. Thank you.
22:00 Thanks, Catherine.
22:02 The next question is from Jennifer Demba of Truist. Please go ahead.
22:10 Thanks. Good morning.
22:11 Hey, Jenni.
22:13 Hi. Just curious, the asset quality is very, very strong. But what do you think are the most vulnerable loan buckets as rates go up and most susceptible here to rising loan losses over the next several quarters?
22:32 Yes, that's a good question. This was our fourth consecutive quarter of net recoveries. We haven't experienced a lot of losses likely. So I guess looking forward is an important piece of that. I don't know that I have one bucket that I would want to call out. Paul, you got anything you want to add to that?
22:46 Well, I would just observe that the -- really the merger is a huge de-risking of both balance sheet and diversification of the loan portfolio. And yes, like Dan, I wouldn't point to any one category as higher risk. I think the risk is well managed across the company. And I would say maybe the previous higher-risk energy portfolio has been de-risked significantly with higher rates as we're seeing profitability in the E&P sector is spectacular. And that, of course, benefits the midstream and the oilfield service portfolio. So -- it's a granular, very diverse credit profile and one of the key reasons why we like the combination so much.
23:35 Yes. From a credit quality perspective, this is the best credit we've been posting for either of us in quite some time.
23:41 And I would just add to that. And when you look at the balance sheets of the businesses, they're extremely strong, a lot of liquidity there. I think we're well positioned if we do have some bumps in the quarters to come from an economic perspective and with rates increasing, but I think we're well prepared for that. And I think our borrowers are as well.
24:00 What do you think a normal range of annual loan losses is for this company over an economic cycle?
24:09 I don't have a number to stick on to that. I mean that's a good question. Valerie, you want to add?
24:16 Yes. I think that's a little bit of a challenging number. But as far as like annualized net charge-offs, legacy Cadence, we would guide toward a 25 basis points normalized over a period of time, net charge-offs. I'd say that's lower from the legacy BancorpSouth history. And so something below those lines?
24:42 When you look at the COVID stress test and some of the portfolios that you might have been concerned about hospitality at legacy BancorpSouth, I mean it just came through with great marks. And so I think Valerie is on the right path, 25 basis points might have been sort of what we thought about for CADE, but something less than that. So combined, I don't know, 10 to 15 basis points. But to hit a narrow range.
25:10 We're clearly watching the clouds that are out there. I mean, I think your question is fair. It appears that there could be some economic headwinds that were there. We're hoping that they blow by and we don't experience some of that. But we have to be prepared for that.
25:27 Thanks so much.
25:28 Thanks, Jenni.
25:31 The next question is from Michael Rose of Raymond James. Please go ahead.
25:37 Hey, good morning, everyone. Thanks for taking my questions. So it looks like the buybacks were weighted towards the back half of the quarter. But as we move forward, just given the drop in DCE and understand the conversation, Valerie, about the mechanics of the AOCI hit. But would that give any sort of pause to future repurchases? And should the stock remain under pressure? Is there capacity at this point? Do you think to actually increase the size of the repurchase? Thanks.
26:14 Yes. So I think a couple of things. Valerie can certainly jump in here. But when you look at the tangible book value, excluding AOCI, we were actually up in the quarter. AOCI to use another word would be transitory and over time neither one of us have had a habit of trading in that portfolio, so that will work its way through over time and the fact that the tangible book value went up excluding that, which is on Page four of the deck, I think, is a positive thing. I think we want to be opportunistic on buyback. I don't think we want to be locked out of the market, but I also think we need to be cognizant of all the moving pieces, which includes AOCI, Valerie?
26:51 Yes. No, I think you really hit on all the points. I think certainly, we've always been opportunistic in the past. The first quarter was pretty heavy activity. It may be a little bit more measured going forward. But again, we have a history, and I anticipate that we'll continue to be opportunistic and do what makes the most sense, balancing all the other things that we have going on. Obviously, loan growth continues to be picking up. And so that is obviously another primary use of capital.
27:23 Understood. Thanks. And then just on the accretion this quarter. Obviously, it was a little bit higher than I think I was looking for at least understand how much you have left. Was there any sort of accelerated paydowns in there? And then, I think you might have given a schedule or expectation last quarter should -- that we should kind of expect on a go-forward basis.
27:46 Yes, that's a good question. There was a little bit of accelerated accretion there. That tends to be bumpy. We had -- we're still looking at, oh gosh, probably about $25 million, $30 million of additional accretion as we go through the rest of the year in scheduled. But again, I would anticipate that it's probably going to end up being a little bit more of that simply because of payoffs.
28:15 Understood. And maybe just finally for me, just two kind of quick housekeeping questions. With the conversion coming in the fourth quarter, I assume a lot of the cost saves will come in and around there. But how much of the cost saves have you realized today? Because I think you targeted 75% for this year. And then just on the one-time cost. Any changes there? I think you had originally estimated $125 million. Any changes there? And how much have you recognized to-date? Thanks.
28:43 Yes. I don't know that there's any change in any of those numbers just the quick answer there. I think the one-time cost, those are hard for you to see sometimes, because some of those costs were incurred pre-closing on the seller side. So you don't see all of that flowing through. We had a relatively low number this quarter. I would suspect that we will see some increasing cost as we move into the next couple of quarters, because we have some things we've got to spend money forward through that computer conversion in 4Q. But from a cost save perspective, I think we feel like we're in really good shape to hit or exceed the numbers that we put out there.
29:19 You're right. As you're looking out to the back half of the year, the biggest pieces of it will fall off in the fourth quarter, but there's little pieces that have been coming along all the way through. Early on, I said we had converted our mortgage shop all onto the same origination platform early in the year. We're in the process of converting the mortgage servicing onto the same platform here in the not-too-distant future. I mentioned a minute ago that we passed now two pretty big hurdles. We actually upgraded and moved our main processing box just over the past weekend. It puts us in a position to be able to do what we need to do that way.
29:54 And we've also upgraded our card processing all the transactions that flow through on the debit card, credit card side, 100s of 1,000s of transactions a day are flowing through, and that was all upgraded just in the last month. So we're making great progress towards the conversion in the fourth quarter, and I think we're very confident we'll hit our numbers.
30:14 Yes. The only other thing I would really add to that is, we've incurred about $55 million-ish or so pre-tax, when you look at the fourth quarter, first quarter and then actually looking back at the third quarter of '21, some of that, that was a little bit early. And so as Dan put it, there will be some more. We may end up beating that estimated overall cost.
30:42 Beating as an coming in less.
30:43 Coming in less. It's a good clarification. But again, as Dan said it, there's a lot of activity happening in the latter half of this year.
30:53 Great. So progress continues. Thanks for taking all my questions.
30:56 Thanks, Michael. Good to hear from you.
31:00 The next question is from Brad Milsaps of Piper Sandler. Please go ahead.
31:05 Hi, Brad.
31:07 Hi, good morning, Dan. Thanks for taking my questions. Not to continue to belabor the cost name, but just kind of wanted to put a finer point on it, Valerie. It sounded like you said that from the third quarter to the first quarter, your expenses may have -- would have been down maybe $7 million from cost savings. I think you initially identified maybe $20 million quarterly, you're going to spend another $2 million, $2.5 million a quarter kind of on inflationary items. So kind of back of the envelope, would that give you sort of $10 million to kind of fall out of the quarterly run rate, all else equal as you get past the conversion date. Does that math still make sense?
31:46 Brad, you run that through my brain again.
31:49 Yes. So post conversion, as we look into 2023, we do anticipate achieving all of the cost saves that we laid out in the document. We talked in the announcement, that's $78 million. And then obviously, we have talked about the impact of the $18 per hour is about $10 million per year. And so there's obviously a little bit of puts and takes throughout there. But you can count on us achieving those merger cost saves. We're committed to that.
32:27 Yes, I think from a big perspective, Brad, when you look at us, I think, we're still very encouraged that the merger gives us the opportunity to not cost out. The wage pressure that we're feeling, that's affecting all of us. That's nothing unique to our company. Everybody is feeling the pressure that's on NSF/OD fees for the industry is impacting all of us not just us. So there are certainly some industry things that are impacting us, but we as a standalone, we think that the ability to bring cost out through our merger is a real positive for us, and we'll meet or exceed probably both sides of those numbers.
33:10 Great. Thank you. And then just as my follow-up, Valerie. Could you talk about maybe plans for the existing remaining liquidity that you have sitting in Fed funds? Do you plan to put that into the bond portfolio with rates higher or just kind of wait and see with what loan growth does. Just kind of curious kind of how to think about the size of the balance sheet and kind of the different categories going forward?
33:34 Yes, absolutely. First quarter is -- has a lot of seasonality on our deposits. We do have a number of large municipal customers, who -- with the tax inflows come in, and then you see those come out in the second quarter. And so part of that liquidity will certainly be to offset some of that volatility and some of that seasonality shift that we will see -- or we anticipate seeing in the second quarter. That obviously using those funds for the loan growth is first and foremost.
34:05 And then it's really going to be effectively what's left over and making sure then that we invest it properly. We do have a lot of cash flow coming off that securities portfolio, about $700 million per quarter. And so that helps fund a whole lot of loans, but also may allow for some reinvestment at some higher rates. Over time, we would like to get the securities book as a percent of assets down as a percent, but that's going to take some time given where we are today.
34:38 The loan guys need to make more loans.
34:39 Absolutely.
34:43 Great. Thank you very much.
34:44 Thanks, Brad.
34:47 The next question is from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.
34:54 Hey, good morning, everyone.
34:55 Hey, good morning, Kevin.
34:58 Hey, Dan, I just wanted to ask about -- it seems like there was a change in treatment on the MSR adjustment, and I definitely recognize that some peers don't break that out and exclude it. And it is on one hand you got hurt by rising rates on the AOCI. So it doesn't seem fair to just arbitrarily decide to exclude that. But you got -- it had been your practice or legacy BancorpSouth practice to exclude it when talking about core performance. So I'm just curious about is this a change going forward and how you're going to view it? And what would the puts and takes in deciding to keep that within core earnings? Thanks.
35:43 Yes, that's a great question. And you're spot on. I think when we look back over time, when we started pulling that out at legacy BXS, it was a big part of the number. It's become more and more immaterial in our process as we've grown, we've been looking at what peers are doing and what's out there. And so we did pull that out of our adjusted numbers, and we also adjusted the -- adjusted numbers looking backwards, so the -- what you see in the deck is all uniform across. But you're right, we've left it in, because it's a much less material number today than it was when we started adjusting for it as a much smaller organization when we were $10 billion.
36:19 And that will be a consistent treatment as we go forward.
36:23 Okay, okay. Great. And can you just give us a sense for a lot of -- how to view the ACL and where that settles going forward. On one hand, I think the combined -- I think you guys might have given up before that on a combined basis what your day one CECL might have been. But on the other hand, we have a little more uncertainty today just with inflation in geopolitical things. And just wondering how to view that ACL going forward, what we should expect? Thanks.
37:02 Yes, that's a really good question. It doesn't have a very good answer and you're exactly right, there's a lot of moving parts. The future risk that's out there is the dark cloud that you're looking at history, four quarters in a row of net recoveries would tell you that credit is in really fine shape. But what the future is bringing to us is the unknown, and so to be prepared for that. I don't know that we have a number to tell you where I think it would shake out. But we're certainly watching our modeling, we're making sure we're accounting for the potential risks that are out there.
37:37 I guess, put it another way. I mean, there's -- I would suspect there's still opportunity for credit leverage for that ratio to come down, but maybe less aggressively than it might have been able to -- or we might have thought a quarter ago?
37:53 I think that's probably fair. I think, again, the unknown is what's happening in the economy with an inverted yield curve and potential military skirmishes around the world, I think that, that's the unknown and what that does to the economy. That puts the cloud over us without those things, I think your statement would be spot on.
38:19 Okay. All right. Thanks very much, Dan.
38:22 Thanks, Kevin.
38:25 [Operator Instructions] The next question is from Matt Olney of Stephens. Please go ahead.
38:34 Hi, thanks. Good morning, everybody.
38:35 Good morning, Matt.
38:37 Most of my questions have been addressed, but I wanted to ask about deposit growth. Yes, it looked good in the quarter, but you mentioned there were some seasonal tailwinds that you guys benefited from. Can you quantify this? Just trying to appreciate if we saw any true sticky deposit growth in 1Q and then kind of the outlook for deposit growth from here? Thanks.
38:58 Yes. So 1Q has historically been the best deposit growth quarter for both of our companies on a standalone. We've not experienced a second quarter as a combined company together yet. So this will be new for us. But second quarter has also been the weakest quarter historically for both of us. So I think the anticipation would be that with the municipal deposits that we were both carrying coming into the merger that we would see similar to what we had seen in the past as standalone entity. So when you look back, I think both of us had seen flat to down deposits in 2Q for the last several years, and I would think that all things being equal, I don't know why it wouldn't be the same this year.
39:38 Got it. Okay. That's helpful. On the mortgage front, it looked like the percent of production sold was down this quarter around 50%, it had been at 78% range over the last few years. Is this a timing issue? Or just structure you guys choosing to sell less the production and to balance sheet more of that? Thanks.
40:04 Yes, nothing has changed from a structure standpoint, there's timing and there's product. So if there's a product mix, we have been retaining the arms on the balance sheet. And so if we're putting more arms or producing more arms, those would stay, but there's been no change in our process. Chris, you want to add in there?
40:22 Yes, no change. There's probably some noise from the combination of the company. It just hasn't shook out yet as well because both sides are doing mortgages, portfolio mortgages, and we were doing a lot more volume relatively speaking, on the secondary market side. So I think it just takes some time for that to sort of balance itself and see some trends that make sense.
40:41 And remember, we finished the merger, the consolidation of all of our origination on the one platform in the first quarter. So there's certainly some timing issues and work going on there.
40:53 Yes. Okay. Thanks guys.
40:57 Thank you, Matt.
41:00 This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
41:08 All right. Thank you all. In closing, I believe our results speak for themselves in terms of the early successes of the combination of our two companies. The fact that we've continued to report meaningful balance sheet growth so soon after the legal merger closing is a tremendous testament for the efforts of our collective group of bankers as well as the cohesiveness of our back office and the credit support functions.
41:29 Aside from industry-wide headwinds on mortgage, our fee income businesses continue to grow at impressive rates. As we look forward, we're challenged -- we've challenged our frontline teammates to build on this momentum, while our back office and supports personnel continue their efforts working towards the successful completion of our integration efforts later this fall. It truly is an exciting time for the New Cadence Bank. Thank you all again for joining us today. We look forward to speaking with you all again soon.
41:58 The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.