Cadence Bank
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Good morning, and welcome to the BancorpSouth Third Quarter 2021 Earnings Conference Call.
[Operator Instructions]
Please note this event is being recorded. I would now like to turn the conference over to Will Fisackerly, Executive Vice President and Director of Corporate Finance. Please go ahead.
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; President and Chief Operating Officer, Chris Bagley; and Senior Executive Vice President and Chief Financial Officer, John Copeland.
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 BancorpSouth's 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 company's third quarter 2021 earnings release.
Our speakers will be referring to prepared slides during the discussion. You can find these slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon.
These slides are also in the Presentations section of our Investor Relations website. And now I'll turn to Dan Rollins for his comments on our financial results.
Good morning, everyone. Thank you for joining us today to discuss BancorpSouth's Third Quarter 2021 results. I'll begin by making a few remarks regarding the quarter. John will discuss the financial results, and Chris will provide more color on credit quality and our other business development efforts. After we conclude our prepared comments, our executive management team will be happy to answer questions.
Let's now turn to the slide presentation and spend a few minutes looking at our third quarter results. Slide 2 contains the legal reminders Will has already discussed. Before I get into the financial results for the quarter, I'd like to provide a brief update on our pending transaction with Cadence Bank, which is highlighted on Slide 3.
As we previously announced, we have received all necessary regulatory approvals, and we look forward to closing the transaction before the end of this week. Both of our teams are very excited about our future together and are actively engaged in finalizing our merger and integration planning. As we have discussed in the past, our new combined leadership team has spent considerable time meeting and visiting with our teammates.
Chris and I have enjoyed getting to know many of the Cadence bankers, and I know Paul, Hank and Valerie have been spending time getting to know the BancorpSouth team. The 5 of us continue to meet daily to ensure we are aligned in our planning. I'm personally extremely proud of the progress we have made since our merger announcement back in April. Hundreds upon hundreds of man-hours have been invested into building the new Cadence Bank.
I think we are all confident our teams are ready to execute and deliver the expected benefits of this merger. Slide 4 provides our highlights for the quarter. While we've known the results reported in the first half of the year weren't sustainable due to elevated PPP income, mortgage volume and a number of other factors, we continue to be pleased with our core operating performance.
Net income available to common shareholders for the third quarter was $70.4 million or $0.65 per diluted share. We had a positive MSR valuation adjustment of $2 million and recorded merger-related expenses of $3.4 million during the quarter.
Additionally, we had a $2.4 million charge under the pension accounting rules to record a partial planned settlement resulting from elevated lump sum retirement payments that we incurred thus far in 2021. When adjusting for these items, we reported net operating income, excluding MSR, of $73.3 million or $0.68 per diluted common share.
PPNR, which excludes the MSR adjustment and other nonoperating items, totaled $90.1 million or 1.29% of average assets on an annualized basis for the quarter. As we look at our business development efforts, which Chris will discuss more in a moment, we had another great quarter for deposit growth, reporting total deposit and customer repo growth of over $720 million or 12.2% on an annualized basis for the quarter.
While we are able to generate a nominal positive spread, the liquidity dynamics in the industry continue to be a drag on margins. From a loan perspective, excluding the PPP forgiveness payments received of approximately $135 million, we reported net organic growth of $122 million or 3.3% for the quarter. This marks the second consecutive quarter of net organic loan growth.
As we mentioned last quarter, the decision to sell most of our PPP portfolio has allowed our relationship managers to have a renewed focus on calling efforts and generating new business. Their success is clearly demonstrated in our results as the third quarter is our most successful quarter from a loan growth standpoint since prior to the pandemic.
The economies across our footprint continue to rebound and perform quite well. As I said, Chris will provide a little bit more in just a moment. Our fee income businesses also had another great quarter. Our mortgage team produced almost $790 million in loans during the third quarter, which is a great quarter by historical standards. On the insurance side, we reported commission revenue of $35.8 million for the quarter, which is an increase of over 9% compared to the third quarter of 2020.
Our insurance producers continue to win new business and [indiscernible] the firm premium market that the industry is experiencing. The next item I would like to touch on is credit quality, which continues to be one of the successes that our management team is most proud of. Our charge-off levels continue to remain very low, which is reflected in the fact that we reported net recoveries for the quarter of $2.1 million.
This trend, combined with stability and other credit quality metrics, including nonperforming and classified asset levels, resulted in a provision release of $7 million for the quarter. While this isn't a sustainable revenue source, it's nice to be able to report such positive credit quality as the economic recovery from the pandemic continues.
The last couple of bullets I'd like to touch on relate to capital management and deployment. We are pleased to have been able to take advantage of our share repurchase program to repurchase just over 1.7 million shares of stock during the third quarter at a weighted average price of $28.69. We paused our program at the first quarter of 2020 due to the economic uncertainty associated with the pandemic and had not been able to resume it until the Cadence merger shareholder vote was complete.
We still have 4.3 million shares remaining in our current authorization, which expires at the end of the year. We've retained a significant portion of the capital we've generated over the last 1.5 years, and our capital metrics remain at very strong levels, which is reflected in our total risk-based capital ratio of 14.27% as of September 30.
I'll now turn the call to John and allow him to discuss our financial results. John?
Thanks, Dan. Slides 5 through 7 show our summary income statement as well as details of our noninterest revenue and expenses. I'll focus my comments this morning on our net interest margin as well as a few other items that had variances compared to the second quarter of 2021.
Before we begin, I would remind you that the 2 transactions that closed May 1, will impact the comparability of the information shown on these 3 slides. This is the first full quarter of financial impact for the May acquisitions.
You'll notice on Slide 5 that we reported a $1.3 million or 0.8% increase in net interest revenue compared to the first quarter. While we have been able to earn a small spread and protect net interest income dollars, the liquidity dynamics that Dan mentioned continue to pressure our margin. Our net interest margin, excluding accretion, was 2.81% for the third quarter compared to 2.94% for the second quarter of '21.
The individual yield and rate components continue to remain fairly stable as the margin trends are almost exclusively a function of mix shift resulting from the elevated deposit growth. Our securities yields were very stable compared to the second quarter, while loan yields, excluding accretion and PPP, and our total cost of deposits both declined 3 basis points, respectively.
We expect our funding cost to continue to decline as the total cost of time deposits remains considerably higher than our current new and renewed rates. Additionally, we will continue to work through the repricing of higher cost public fund deposits upon renewal. Slide 6 shows the breakout of our noninterest revenue components. There's really very little to cover here that's incremental to the comments Dan has already made regarding mortgage and insurance. We did see a nice increase of over 16% and our deposit service charge revenue for the quarter compared to the second quarter.
Slide 7 provides the details around our noninterest expense. Dan mentioned the 2 items that we classify as nonoperating, merger expense of $3.4 million as well as the pension settlement charge of $2.4 million. Similar to the fourth quarter of 2020, this charge was the result of elevated lump sum retirement payments exceeding the threshold for partial planned settlement.
Beyond these items, I believe salaries and benefits, which increased $4.8 million quarter-over-quarter is the only other significant item that warrants additional color. There are several factors contributing to this increase additional months' worth of activity associated with the 2 mergers was one contributing factor.
Beyond that, the primary driver was our annual compensation adjustments, which were effective on July 1. Finally, we continue to see significant wage pressure across the board, both geographically and across all job functions. That concludes my comments on the financials. Chris will now provide some color on our business development activities. Chris?
Thank you, John. Good morning, everyone. Slide 8 of the presentation reflects our funding mix and deposit trends for the quarter. We reported total organic deposit growth of $722 million or just over 12% annualized. Clearly, the bank and the industry as a whole continues to experience unprecedented liquidity. Our focus remains on protecting relationships and managing deposit costs down. As John mentioned, there is still opportunity to continue that trend. An example, our total time deposit costs for the quarter were just over 90 basis points, while our new and renewed rates today are well below that mark.
As I've mentioned before, we also have an opportunity to drive public fund costs down further but that will be somewhat lumpy as the maturing in price at various times. Moving to Slide 9, you will see similar trend data for our loan portfolio.
We received PPP forgiveness for payments in the quarter of $135 million. When you adjust for this, net organic loan growth for the quarter was just over $121 million or 3.3% on an annualized basis. As Dan mentioned, this is the second consecutive quarter of net organic loan growth that we've experienced.
After the PPP adjustment, we saw meaningful growth in our C&I non real estate, commercial real estate and consumer mortgage portfolios. From a geographical perspective, most of the growth opportunity during the quarter was in our Texas and Tennessee markets.
Additionally, our corporate C&I and syndications team had a great quarter from a loan growth perspective. Moving to Slide 10. Credit quality continues to be a good story for us. We reported net recoveries for the second consecutive quarter. Net recoveries of $2.1 million, combined with declines in our classified asset levels, contributed to a provisional lease of $7 million for the quarter.
Our reserve coverage ended the quarter at 1.74%, excluding PPP loans. Finally, as shown on Slide 11, we continue to monitor the lingering impact of credit decisions we made to assist customers during the early part of the pandemic. The loan totals that are either in deferral or that have been temporarily converted to interest-only continued to decline quarter after quarter.
As of 9/30, we had $26 million in deferral and $91 million in interest only. And all is scheduled to return to regular payment schedules over the next few months. In our view, this is really a nonstory at this point in the cycle. Unless there is a change in the economic trends, we expect this to be the last quarter that we will provide this particular disclosure.
Slide 12 provides a 5-quarter look at our results for insurance and mortgage products. Mortgage reported origination volume of $790 million for the quarter, 65% which was purchased money. While the slight decline in the pipeline resulted in margins being a little below what we would call a more normal or average level, these results are strong by historical seasonal standards.
Refinance activity has slowed as expected, but the housing market remains strong across our footprint. The anecdotal examples around multiple quick offers above asking price on new listings have extended into our smaller markets as well. Historically, that type of demand has been seen primarily in our more urban geographies.
Moving to insurance. Total commission revenue for the quarter was $35.8 million, which marks the second consecutive quarter that we've reported near double-digit revenue growth on a percentage basis when compared to the comparable quarter for the prior year. A very high customer retention rate, new business success and continued firm great market have combined to result in a very nice revenue growth for the insurance team. Now I'll turn it back over to Dan for his concluding remarks.
Thanks, Chris. It's a really exciting time for us, and it's taken everyone working together to make the results that we reported possible. The effort of our relationship managers are evident in the results reflected on both sides of the balance sheet. All of our fee lines of business, mortgage, insurance and wealth management are performing very well and making meaningful contributions to our performance. And perhaps most importantly, our credit quality metrics are very strong by any standard.
This is a direct testament not only to the efforts of our relationship managers, but also the quality of our underwriting and risk management processes. Finally, the optimism around our company is at an all-time high as we expect to close our merger with Cadence later this week to create the new Cadence Bank.
The operational support teams for both our bank and Cadence have been working around the clock to prepare for the upcoming legal closing and to begin executing on our integration processes. In fact, here with us today is Paul Murphy, Valerie Tolson and Hank Holmes. Operator, our team is now ready to answer any questions.
[Operator Instructions]
Our first question comes from Brett Rabatin of Hovde Group.
I wanted to first ask -- when I look at the organic growth for BancorpSouth, $122 million and $76 million for Cadence in the quarter, obviously, one of the big things with this deal is that Cadence brings to BancorpSouth a much stronger commercial effort and get you guys years ahead of where you would have been. Can you maybe give us an update on how you think about the pipeline from here and maybe growth expectations and how you view that?
Sure. I'll take a stab, and we've got plenty of people here that can help on that. I think that when you're looking at the $122 million for us, that was heavily weighted into the C&I side. We don't see it because the $135 million that went away from PPP came out of the C&I side, but C&I continues to perform well.
We saw an increase in CRE. Our pipelines are really looking good. Chris, do you want to tag in on the pipeline? And then Hank can talk about what's happening at Cadence.
Yes. I'll just add that Dan mentioned it, our organic growth, net of PPP was more heavily weighted towards C&I, about 60% of that growth. And our pipelines look good. I think we're seeing -- we're getting a look at quite a few opportunities in the -- all across the geographies and all different business lines. Hank, what do you guys think?
Yes. Thanks, Chris. And Brett, I appreciate the question, and I'm excited about being on the call with our BancorpSouth brands. And I would add to that. We're seeing nice volumes in our loan committee that we haven't seen in quite some time. I'd also like to report that it's really across the board. There's no real geographic concentration or specialized concentration.
And the timing that it takes to close on C&I transaction is a little longer. So we're optimistic about seeing that growth through the end of the year and into next year. We also have a strong CRE portfolio that performed quite well during COVID and is trending in the same direction this year. In fact, they're going to do better this year than they did last time.
And given their construction loan, we'll see some nice volumes and advances out of that crew as well. So overall, from a pipeline perspective, as we review those, they are steady. I would echo Chris' comments and we're getting a lot of good looks really the only headwind there is we are seeing some pricing pressure, but optimistic about the growth going forward.
And when you look at our earnings announcement, our being BXS side, I guess there's 2 earnings announcements to look at. When you look at the BXS earnings announcement, we break out the 5 state. And you can see Texas had the best growth we've had in many, many quarters, we grew a little over 15% in Texas in the quarter. And then while we're brand new in Georgia in the last 2 quarters, our Georgia, Tennessee footprint also had a little less than 10% growth. When you look at the going forward and the pickup of the Atlanta market, the Tampa and Orlando markets in Florida, I think we feel pretty good about what's happening in Texas has been positive for us and the Cadence team for a long time.
So I think looking forward, we feel pretty good, Brett.
Dan, would you care to take a stab at thinking about an outlook for loan growth on a percent basis? Or is it just too early to take stab at that?
Yes. I think it's too early to talk about a percent, I think. But I think that as we've been around, you heard me say a few minutes ago, we've all been making the rounds. We've been all over our footprint talking to the relationship managers that are out there, and there's a lot of excitement around opportunities for us to do more for our customers than we've done in the past.
So I think the footprint is open. But when you're looking at our footprint from an economic standpoint, the markets are performing well. We're open businesses being transacted. So I think there's opportunity for us.
Okay. I appreciate the color there. And then the other question I had was just around the liquidity. It looks like you guys bought about $1 billion in securities this quarter. And obviously, Cadence has a even more liquid balance sheet than you guys do. Can you talk maybe about purchases from here, what you bought in the quarter and what you might do with the liquidity from the Cadence side of the equation?
Liquidity. Liquidity is not our problem right now. We have plenty of that. Valerie, you want to jump down on that side?
Yes, sure. Thanks. So yes, obviously, both banks have had significant liquidity. And the BancorpSouth Group has been more active in buying securities than we have. I think that you'll see is one of the things that we've been doing is eager to get our banks merged.
And so post-merger, be able to do a number of things on the balance sheet that we've been holding off on doing so far. So we've got both balance sheets put together in our outcome modeling, and we're looking at the different scenarios as we go forward. But obviously, with our strong capital, with our strong liquidity, we're well positioned to be able to put some of that liquidity to work in a variety of different ways.
John, the specific was what are we buying?
Yes, we're buying variable rate mortgage backs, and that's one of the reasons you see the big unrealized loss in AOCI change from quarter-to-quarter. So that's mostly what we're buying now.
Does that help you, Brett?
That's helpful.
Our next question comes from Michael Rose from Raymond James.
I just wanted to start on Slide 3. So when I look at the metrics, they're all the same, except for the asset size of $48 billion relative to the original slide deck. And I'm just wondering, with the environment having improved and some pretty good growth out of both sides, why wouldn't those numbers be higher? Are they just not updated? Would just love some updates on kind of what the -- maybe some of the closing merger assumptions could be versus where they were back in April.
Yes. So the team is working really hard to be ready for the closing that's coming up in a few days. The only number that was updated on this slide, and you read the footnotes, was the asset side. So when you're looking at the other boxes, that's still looking at announcement numbers.
And we haven't put out any new numbers on what we look like on a combined basis. The mark-to-market accounting team is working hard. The accounting team is working hard. There's a lot of activity going on behind that. Valerie, I'm going to let you jump in here again.
Yes. No, you're exactly right. Those are all numbers that we'll be updating as of the close. And so while there's a lot of work going on to prepare for that and a lot of analysis and a lot of trends and so forth, not quite ready for prime time.
Is it fair to characterize it though as the environment has improved and that those numbers could ultimately prove to be conservative? Is that the way we should all be thinking about it?
I think some things have certainly improved. The interest rate environment and the margin environment hasn't improved for us. But I think when you're looking at what we've got from the opportunity to grow, but going back to April, I think there was a lot more fear in the market on the look-forward economic activity in April. We've talked about the mark coming down.
We knew we were taking a pretty hard mark in April. But as you look back, the markets have all improved since then, both of us had reserve releases in the last quarter. So from an economy standpoint and a credit quality standpoint, we know we've got an improving situation.
From a -- where we're going with the deposits that are flowing in, and the liquidity, we can't seem to turn them off. Both of us had tremendous deposit growth in the quarter. And so that continues to damage our net interest margin.
Our next question comes from Jennifer Demba from Truist Securities.
Dan, just wondering what your share repurchase appetite looks like over the near term. You've got like over 4 million shares left on the authorization.
Yes. I think that we want to be -- we have excess capital. So I think we want to be opportunistic as we've been in the past. I think we'll be looking for the opportunities to deploy that capital. And should the opportunity arise this quarter, I would expect that we would be back in that market. Does anybody want to add on to that in here? Paul or Valerie? Hank?
No, absolutely. In addition to what you saw BancorpSouth acquire during the third quarter, Cadence also acquired 2.4 million shares. And so we've both been active in the market when the markets are right for us.
So combined, it was right at $100 million in total repurchases in the quarter.
Meaningful.
Dan, can you also talk about your technology investment priorities over the near term and where you really want to place emphasis over the next 12 months or so?
Yes, the tech teams have really been working hard to try and make sure that we understand where we are. So the process we've gone through was to identify current state, what are we both doing today, what processes are we driving today, what technology are we driving, what's customer-facing. And then also what's inside the bank for our teammates to be driving off of.
And then we've identified what we want to be in a future state. And so now we've got to build our road map to get us from current state to future state. And that process is starting now. So by the end of the week, that process -- we'll begin executing on those plans. We'll spend a big part of 2022, consolidating the 2 teams together, that will be coming in stages and in steps.
We think that our mortgage teams will be all on one platform before the end of this year. We think that we have a couple of other groups that will be converting over or operating all on one platform in 1Q and 2Q next year. And the final phase of the big computer conversion will be later in 2022.
But when you're looking at future investments, clearly, it's what's the consumer doing and what's the commercial customer doing. So when we're looking at our treasury management products and the app features around treasury management. That's a key product that's out there for us when you're looking at the consumer side, making sure that we've got the consumer app in place.
Both of us have been in the process of deploying IPMs, our interactive teller machines, video teller machines. That's working well for us and helps us reduce cost in the branches. So there's a lot of activity going on, on that front. I don't know that I have any one specific item that I would call out, Paul, you're close to that.
Well, I mean it was a good summary. Jennifer, I know we've talked about some of these things on prior calls, but we are pleased that the more we look at the combined organizations, it's really -- it's a slogan, but it's really true. We are better together. So we look at -- for example, our digital initiative, which is substantial and has some traction, and so BancorpSouth has a similar initiative. They're focusing on some things if we weren't -- you look at robot process automation initiatives that they have -- we have.
We're just going to go further faster together because we're going to have more resources. We will be able to do some early conversion of the mortgage business, for example. That will be probably fourth quarter. So as Dan mentioned, the longer-term process for the conversion next fall, the big conversion is on track.
But it is one of the more exciting things about putting 2 companies together, how you can do more things faster and some of the things that we're clearly the right steps for us, you can get to it much quicker when you have more resources.
Our next question comes from Kevin Fitzsimmons from D.A. Davidson.
Just a question on expenses. I know pulling the nonoperating items out, which I did, we still saw expected to pick up linked quarter. And I know there was a reference to I believe personnel expenses being up partly due to the teams working on the merger activity.
So I'm just trying to drill down into -- is any of that expense load in third quarter, was it -- would you call it -- maybe you did identify it as noncore, but would you call it non-run rate or pulling forward some of the expenses related to the deal or on a combined basis that might make that expense base a little inflated versus what we should model in going forward?
There may be a little of that. So when you look at the salary benefit of costs specifically. Remember, we only had 2 months of the last acquisitions in the last quarter. We had a full 3 months of those 2 acquisitions in the third quarter. So there's part of your increase. John mentioned our annual salary process and review is a July 1 effective time.
So that's another piece of that puzzle that's got an impact on it. And then we continue to experience wage inflation. So folks want to talk about transitory inflation. I don't have an opinion on that, but I can tell you from a wage pressure, there is wage pressure out there today. We're seeing that and we're feeling that.
I think that your question specifically is around it, if we have some wage costs in there that may not be future run rate. My answer is probably a little bit, but I don't know that I would be able to identify in a number. We continue to watch expenses closely. And I do think we have the ability to continue to drive expenses down as a stand-alone entity.
Obviously, when you put us together, it's a little different. And we should be able to start seeing some benefit of some of that. We'll see some cost saves coming out of the gate on things that we can turn off the media. But it will take a while to turn the rest of them on. Valerie, do you want to tag on?
I think you said it well, as we look at our expense savings, it's things that we're starting to layer in into 2022 planning. But obviously, as we announced the acquisition, they -- most of that, there was a full impact of that will be 2023. But we are absolutely working to get as much of that in as soon as we can.
John, would you identify anything specific that was in 3Q spot run rate?
No. No, I think it's pretty much all run rate. Yes. And as we -- as Valerie mentioned, we're in the budget process for 2022. That's really the first big step in identifying cost saves that will be achieved later on down the road.
That help you, Kevin?
Yes. No, I appreciate that. That's very helpful. Just one other quick one. From me earlier, I believe Valerie had mentioned that there were some balance sheet moves that you all were -- you want to get past closing, obviously, as you were holding back to it. Can you give us some examples of what kind of things those are that you could do, but you're holding back doing until you get past the close?
Holding liquidity would be one, so we don't end up in a mark-to-market. Go ahead, Valerie.
Yes, that's exactly right. One of the things we wanted to do was through the modeling, get our balance sheet combined on our asset liability modeling, which we have together now to evaluate our portfolio together to evaluate our over balance sheet asset sensitivity together and best strategize on how to deploy some of this liquidity.
As you know, there's value obviously in going in the securities book, but doing it the right way is something that we pay a lot of attention to because of the impact of where we are on the rate curve and the impact to those portfolios when the rate curve start to increase. So we're spending a lot of strategic time on that, and you'll start to see talk about that a little bit more as we are a combined company in the very near term.
Our next question comes from Catherine Mealor from KBW.
I just wanted to follow up on Michael Rose's question, just on looking at the Slide 3 and the pro forma EPS accretion and tangible book value, accretion also that we're going to see from the deal. And I totally appreciate that that's not updated. But is there anything that we should -- I guess is there anything to be aware of that would be a negative to either better EPS accretion or tangible book value accretion with this deal?
Because I think the way I would think about it as credit is a lot better, so the mark should be lower. And also, the balance sheets are bigger. And so the liquidity is, of course, impacting the margin, but still the balance sheets are better because of all the liquidity.
And so that coming together, I would imagine should bring EPS accretion better as well. So just kind of any headwinds that we should be aware of that wouldn't allow us to think that EPS accretion should actually look a lot better today than maybe it was when the deal was announced?
I think those are -- I think that assumption is right, a bigger balance sheet and better credit quality. I think we have agreed all along that it's credit marks moved down. That's a net positive to tangible book value. And obviously, we're seeing that happen. We don't know the numbers at this point, but it will be different than what we had announced back in April.
And again, to me, the biggest negative is, is we continue to bring deposits in and it's been -- we're making very few basis points of the deposits that we're bringing in. We've got to be able to deploy that. So you're back to the [indiscernible] to go alone.
So if the economy continues to improve, in the footprint that we're sitting in, we feel pretty good about the opportunities in front of us. Valerie?
I think you said it well. And I think, Catherine, nailed it in the fact that there are a lot of positives. And the fact that we are a bigger balance sheet is better, but it's all about deploying that excess liquidity. And that will be something, obviously, that we'll be [indiscernible] to do.
So the 2 biggest markets that we're in or I should say the big markets that have the biggest presence for us from a loan perspective is Atlanta and Houston. So I thought you were going to talk about the Braves and masks for us, but both of those markets look pretty strong from a growth perspective.
And then I'll just try to add in here. Think about historical Cadence operating results, a PPNR attracted top quartile, maybe a little better efficiency ratio. I mean last quarter at 56%, but while we are an efficient model and attractive earnings organization, and it's going to emerging well and nicely with BXS.
Great. Yes. My other question maybe is just on the expense side. I totally understand this is probably a good full quarter to look at. Maybe as we think about the timing of cost savings -- I think last you said the conversion was slated for late 2022. So could you give us any kind of thoughts on what level of cost savings we could see upfront before we get to conversion and then the timing when we'll kind of see a full quarter run rate of the pro forma cost savings fully in the numbers?
I think you'll see a full run rate in 1Q 2023. So I think you've got a long way to go to see a full run rate. But I think you'll see cost saves stepping in -- coming out of the gate. There are certainly things that we will be able to turn off on Friday that will be less expense than what we're combined spending today. I don't know that we have a run rate analysis that would tell you what we're going to see in 4Q, 1Q, 2Q, 3Q next year.
I think it will continue to ramp up as we do exactly what Paul was talking about a minute ago, where we start moving some things together. Every time we can consolidate or combine or convert whatever language you want to use the different parts of the bank that we're putting together, all of that turns into cost savings for us.
Our next question comes from Jon Arfstrom of RBC Capital Markets.
A couple of questions here, but most of it has been handled, but -- In terms of lending at both companies, safe to say that the growth that you're seeing is a trend and pipelines are improving. Is that a fair characterization?
I'll let Hank and Chris jump in here on that one.
It's yes -- very fair.
Affirmative. I agree with that as well.
Okay. I like that kind of an answer. Also, the -- just a question on lending appetite once the merger is done, any changes to the approach as credit and risk come together for the 2 companies?
Jon, I think, well, changes in that we're better together, as Paul said earlier. So in much -- almost everywhere we look, including credit and opportunities, we're just very synergistic. They've got some expertise in business lines that we don't have, and we have some that they don't have. They fit together very well. That gives us more opportunity to grow revenue in different channels at different times.
When we put the 2 balance sheets together from a loan perspective, I think we impact the concentration levels that both banks were dealing with in certain segments. in a positive way before they -- we derisk from that concentration perspective. That's a plus.
That gives you more fuel in each one of those lines to kind of drive some additional business opportunities, and we're bigger. So you would expect that you would be able to even take care of some of your existing customers in a larger fashion. So I think those are all positives. We've spent a lot of time together from a credit perspective, putting our loan policies together.
We can tell you from the BXS side, we're very excited. We have full -- we have very -- we have strong confidence in the credit side of the Cadence side of the house. It's been a very productive and positive journey, putting the loan policies together. We feel good about where our underwriting parameters and views on the types of credits we want to do going forward. And so I think it's just very positive. Hank, do you want to add anything?
--
Well, the only thing I would add to that is that I think Chris said it well, was the BancorpSouth team was doing -- was getting going and doing what we like to do on the C&I side. And so I think this is an acceleration of that and building on that team brings us together. I also believe that in our community bank, there's some opportunity there to do a little more than what we have done historically at Cadence Bank, and I know our teams are excited about that as well. So I think Chris said well, I want a few things I would add.
We're just a few days away Jon, from the we and the they turning into we.
Jon, one of the things for -- I know you know us both well, but one of the good things about our situation, just a reminder is that there's very little market overlap. So really, all of our bankers over the -- let's go back and call, we've got a bigger balance sheet.
We have our first joint Board committee meeting coming up this week. And so we'll be making final decisions on what exactly hold limits we're going to have. But we're just going to inch up a little bit. We're really not going to make a big move on increasing hold limits.
But we will be able to lead some bigger transactions, so that will help. But again, the market opportunity for us to really just double down on the calling effort is right before us.
Okay. You all may have just answered this, but anything else, Dan, you'd want to call out on revenue synergies that maybe you've discovered since the April announcement as you get familiar with each other?
I don't know if there's anything new that we would call out, but the same excitement that we've been talking about all along is there. Our insurance team is just chomping at the bit to get out. Insurance revenues are growing today. We know we've already won some new business in this quarter.
We think that the ability to partner up with the Cadence bankers in the and soon to be Cadence insurance team is exciting. The mortgage team, as we've talked about before, it doesn't have a big mortgage presence in the Georgia or Florida footprint. And we're actively recruiting in those markets. So there's clearly opportunities. We just need to execute and keep moving forward.
[Operator Instructions]
Our next question comes from Matt Olney from Stephens.
I wanted to go back to operating expenses. And I guess, ask Valerie on the Cadence side, kind of the same question about the third quarter expenses, anything unusual? I think you called out the merger expenses and then another settlement gets us to a core run rate around $103 million in the third quarter. Anything else you'd call out that's unusual that wouldn't be in the run rate from here?
Yes. Thanks, Matt. The only other factor that I would say is a little bit unusual is a little bit higher incentive accruals. As we look through the year, and obviously, the excellent credit results that we've had throughout this year impacts the overall incentive accruals.
And so we factor that in and that definitely plays into what you see really as part of some of the increase there in the salaries and employee benefits line. Other than that, it's really captured for the most part in the merger expenses and then obviously the regulatory fees as well.
Got it. Okay. That's helpful, Valerie. And then, I guess, changing topic. I want to ask more about interest rate sensitivity of the combined bank. It seems like there's some nice upside to higher rates for each bank by itself. Can you speak to the banks to higher rates and then made thoughts on the combined company?
Can you tell us when rates are going to be higher first?
I'm going to guess a year from now, Dan. But my guess isn't worth a whole lot.
Okay. Yes, that's all helpful. I do think we're excited about the sensitivity bar. You've got the specific numbers. We've been modeling the combined entity for some time. Go ahead, Valerie.
Yes, sure. So when you take the 2 banks combined, it actually increases same for itself, asset sensitivity and decreases Cadence Bank sensitivity probably about at half. So it will be a little positive over neutral. That being said, that is the existing balance sheet. As we leverage some of the additional liquidity into loans, the largest portion that those banks are seeing in our loan growth in C&I lending.
And so that will continue to push the asset sensitivity higher. On the Cadence side, we've got about 2/3 of our loan growth that's coming in today is actually C&I driven. And so all of that will certainly help as we start to increase rates. Both banks do have a number of loans on their floors. And so the very first rate movement or so will be muted by that.
But once you get a long past the first win, you'll start to see more and more positive impact from that. We also believe that where our deposits are positioned, we both have significant noninterest-bearing deposit levels and where our [indiscernible] of reprice, that we'll also be able to appropriately lag those rate to deposit costs along with the industry that will certainly help see that benefit. When and if we start to see some of those rates.
I think on the BancorpSouth side of the aisle, Matt, we've still got downward movement in deposit cost. Cadence has got really good deposit costs and not seeing the big drops that we've seen. But we still have the ability to walk down our deposit cost if we're still running on the same 3 or 4 to 5 basis points a quarter for some time.
Yes. Okay. And Dan, that last point as far as downward pressure on deposit cost, I think you also mentioned some pressure on overall core loan yields. Do you think that you can manage deposit costs lower in line with those lower loan yields? Do you think give me the opposite?
I don't know that I have an answer for that with any conviction. I think clearly, loans are competitive, and the market is very competitive out there today. Everybody wants to be growing loans. There are some folks that will price to buy credits. There are some folks that may be stretching more on terms. I don't know if we concluding the term at all. We're certainly trying to make sure that we're protecting good customers. Sometimes when you're protecting good customers, that means you're bidding up on some price. So I think that's a hard question today.
What the deposit cost will do is just benefit us in some way. I would hope that we could keep up, as you just mentioned. But I don't know that we have any modeling that will tell us whether we can or cannot.
I think that as you take a look at the pace of the deposit costs, it will be a little bit more gradual. And on the loan yield, it's going to depend on volumes. If we get back to some pretty meaningful net origination volumes those lower yields are going to have an impact on those loans. That being said, it's going to be significantly better than the yield of cash for investment.
And also -- Paul. BancorpSouth side, we're putting on the balance sheet drives that quarterly loan yield. And so what we've been growing big in the C&I side, if there's opportunity to grow on the bank side that Hank was talking about on the real estate side, that will move that yield up a little bit, but you just don't know where you're going to get growth from quarter-to-quarter.
This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks.
All right. Thank you all for participating today. As you can hear, I think you can hear clearly that we're really excited about what the future looks like for us as a combined company. We're excited to start from new Cadence in place on Friday. Thank you all very much for your time today. Look forward to catching up with you again soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.