Cadence Bancorporation Reports Second Quarter 2020 Financial Results

Cadence Bancorporation (NYSE: CADE) (“Cadence”) today announced a net loss for the quarter ended June 30, 2020 of ($56.1) million or ($0.45) per share, compared to net income of $48.3 million or $0.37 per share for the quarter ended June 30, 2019, and a net loss of ($399.3) million or ($3.15) per share for the quarter ended March 31, 2020. Adjusted net (loss) income(1), excluding non-routine income and expenses(2) (and the goodwill impairment charge for first quarter 2020), was ($56.9) million or ($0.45) per share for the second quarter of 2020, compared to $51.3 million or $0.40 per share for the quarter ended June 30, 2019 and compared to $12.5 million or $0.10 per share for the quarter ended March 31, 2020.

“The challenge and uncertainty of the second quarter in many ways brought out the best in Cadence and I am proud of how our team operated and served our customers through it all. Our pre-provision results continue to showcase a key strength of our operations, highlighted by our increased net interest income and continued expense management. That noted, clearly the credit backdrop is very challenging, as our portfolio has been meaningfully impacted by the COVID-19 pandemic and related economic shutdown. This quarter, we again spent a great deal of time critically reviewing our portfolios to ensure we are fully reflecting the realities of the environment. While the trajectory of the pandemic and its impact on the economy remain uncertain, we are very confident that our risk management and robust capital position will allow Cadence to exit this crisis in a strong position,” stated Paul B. Murphy, Jr., Chairman and Chief Executive Officer of Cadence Bancorporation.

Second Quarter 2020 Highlights:

Second quarter 2020 highlights (compared to the linked quarter where applicable) are as follows:

• Adjusted pre-tax pre-provision net revenue(1) for the second quarter of 2020 remained consistent at $95.0 million, a decrease of $1.1 million or 1.2% compared to the second quarter of 2019 and an increase of $2.0 million or 2.1% compared to the first quarter of 2020. As a percent of average assets, adjusted pre-tax pre-prevision net revenue was 2.06%, 2.18%, and 2.11% for the second quarter of 2020, second quarter of 2019 and first quarter of 2020, respectively.
• We originated $1.0 billion of loans under the Paycheck Protection Program (“PPP”) during the second quarter of 2020. These PPP loans are 100% federally guaranteed and were fully funded by core deposits.
• Total deposits increased $1.6 billion as non-interest bearing deposits increased $1.3 billion to 32% of total deposits. At the same time, we aggressively managed funding costs, with total deposit costs at 0.46%, representing a decline of 50 basis points from prior quarter.
• Our tax equivalent net interest margin (“NIM”) remained notable at 3.51%, in spite of the impact of lower interest rates, lower yielding PPP loans and securities, and lower accretion income on acquired loans. The gain on our collar transaction and our deposit cost management continue to provide a strong foundation to our NIM.
• Adjusted expenses (see Table 10) declined by $5.1 million and we realized an adjusted efficiency ratio(1) of 47.9%, down from 49.9%.
• The provision for credit losses for the second quarter 2020 was $158.8 million compared to $83.4 million in the linked quarter reflecting degradation of economic forecasts, depressed energy markets and COVID-19 driven stress. As of June 30, 2020, our Allowance for Credit Losses (“ACL”) was 2.71% of total loans, up from 1.83% at March 31, 2020. Excluding PPP loans, our ACL was 2.93% at June 30, 2020.
• Capital remained very strong with our Common Equity Tier 1 capital ratio increasing to 11.7% and total risk weighted capital increasing to 14.3%, providing a robust capital base well-positioned for the current environment.
• Annualized returns on average assets and tangible common equity for the second quarter of 2020 were (1.22%) and (10.56%), respectively, compared to 1.10% and 12.23%, respectively, for the second quarter of 2019 and (9.08%) and 3.86%, respectively, for the first quarter of 2020.
• Adjusted annualized returns on average assets(1) and adjusted tangible common equity(1) for the second quarter of 2020 were (1.24%) and (10.73%), respectively, compared to 1.17% and 12.96%, respectively, for the second quarter of 2019 and 0.28% and 3.62%, respectively, for the first quarter of 2020.

Balance Sheet:

Total assets were $18.9 billion as of June 30, 2020, an increase of $1.4 billion or 7.7% from June 30, 2019, and an increase of $1.6 billion or 9.4% from March 31, 2020 driven by the issuance of PPP loans and meaningful growth in deposits impacted by fiscal stimulus during the second quarter.

Cash and Cash Equivalents at June 30, 2020 totaled $1.9 billion as compared to $0.8 billion at June 30, 2019 and compared to $0.6 billion at March 31, 2020. The $1.3 billion increase in the second quarter of 2020 resulted from the increase of $1.6 billion in deposits during this quarter.

Loans at June 30, 2020 totaled $13.7 billion as compared to $13.6 billion at June 30, 2019, an increase of $71.2 million or 0.5%. Loans increased $306.9 million or 2.3% from $13.4 billion at March 31, 2020. The linked quarter increase included the origination of $1.0 billion in PPP loans, offset by approximately $693 million of net loan paydowns and payoffs. The declines were driven by reductions in the C&I segment, including paydowns of defensive draws taken in March, and strategic declines in the restaurant, energy and leveraged loan sectors as we work to reduce select exposures.

Investment Securities at June 30, 2020 totaled $2.7 billion or 14.1% of total assets as compared to $1.7 billion or 9.6% of total assets at June 30, 2019, an increase of $976.6 million or 58.0%. Investment securities for the second quarter of 2020 increased $199.8 million from $2.5 billion, or 14.3% of total assets at March 31, 2020. The increase in securities from both the prior year and linked quarter is a result of substantial growth in deposits and lower loan originations outside of the PPP loans. Securities acquired during the second quarter include primarily investment grade municipal bonds and agency-backed mortgages.

Goodwill at June 30, 2020 totaled $43.1 million, down from $483.2 million at June 30, 2019 and unchanged from March 31, 2020. As previously reported, the Company recorded a $443.7 million ($412.9 million, after-tax), non-cash goodwill impairment charge in the first quarter of 2020. The remaining goodwill at June 30, 2020 relates to our registered investment advisory subsidiary and trust division.

Total Deposits at June 30, 2020 were $16.1 billion, an increase of $1.6 billion or 10.9% from both the June 30, 2019 and March 31, 2020 levels. Second quarter 2020 core deposits increased by 11.3% as a result of customers maintaining additional liquidity in the current environment and broader impacts of fiscal stimulus. Non-interest bearing deposits increased to $5.2 billion at June 30, 2020 or 32.5% of total deposits, up from $3.3 billion or 22.8% at June 30, 2019 and up from $4.0 billion or 27.3% of total deposits at March 31, 2020.

Shareholders’ equity was $2.0 billion at June 30, 2020, a decrease of $380.6 million or 15.7% from June 30, 2019, and a decrease of $68.1 million or 3.2% from March 31, 2020. The linked quarter decrease included the quarterly net loss of $56.1 million, $6.3 million in cash dividends, and a decrease of $7.2 million in other comprehensive income which was largely driven by a decrease in the realized gain on the interest rate collar as amounts were recognized in interest income. The year over year decrease was impacted by the goodwill impairment in the first quarter of 2020.

Tangible common shareholders’ equity(1) was $1.9 billion at June 30, 2020, an increase of $77.7 million or 4.2% from June 30, 2019 and a decrease of $62.6 million or 3.2% from March 31, 2020. The linked quarter decrease resulted from the same factors noted above.

• Total shareholders’ equity to total assets and tangible equity to tangible assets were 10.8% and 10.2%, respectively, at June 30, 2020 compared to 13.9% and 10.8% at June 30, 2019, and 12.3% and 11.5% at March 31, 2020, respectively.
• Tangible book value per share(1) was $15.15 as of June 30, 2020, an increase of $0.94 or 6.6% from $14.21 as of June 30, 2019 and a decrease of $0.50 or 3.2% from $15.65 as of March 31, 2020.
• Total outstanding shares at June 30, 2020 were 125.9 million.

Tangible common equity to tangible assets was 10.2% at June 30, 2020, and quarter end capital ratios remained robust and other than the leverage ratio, increased during the quarter due to lower risk weighted assets.

Asset Quality:

Credit quality metrics during the second quarter of 2020 reflected worsening economic factors as a result of COVID-19 and depressed energy prices, along with associated increased stress of certain borrowers, predominantly in the Restaurant and Energy categories.

• Net charge-offs for the second quarter of 2020 were $32.6 million or 0.94% annualized of average loans compared to $18.6 million or 0.54% annualized and $32.5 million or 0.99% annualized for the quarters ended June 30, 2019 and March 31, 2020, respectively. The current quarter charge-offs included $14.2 million in Energy, $13.4 million in General C&I and $4 million in Restaurant sectors.
• Provision for credit losses for the second quarter of 2020 was $158.8 million as compared to $28.9 million for the second quarter of 2019 and $83.4 million for the first quarter of 2020. The current quarter’s provision was significantly impacted by an economic forecast that was adversely affected by the COVID-19 pandemic and depressed oil prices, as well as associated net credit migration within certain portfolios. Our calculation for the ACL used the baseline scenario provided by a nationally recognized service, as adjusted for qualitative and environmental factors.
• The ACL was $370.9 million or 2.71% of total loans as of June 30, 2020, as compared to $115.3 million or 0.85% of total loans as of June 30, 2019, and $245.2 million or 1.83% of total loans as of March 31, 2020.
• Loans 30-89 days past due were 0.19% of total loans at June 30, 2020, compared to 0.16% at June 30, 2019 and 0.19% at March 31, 2020.
• Accruing loans 90 days or more past due were 0.02% of total loans at June 30, 2020, compared to 0.23% at June 30, 2019 and 0.01% at March 31, 2020.
• NPL as a percent of total loans were 1.64% at June 30, 2020, compared to 0.80% at June 30, 2019 and 1.19% at March 31, 2020. NPL totaled $224.4 million, $108.8 million and $159.7 million as of June 30, 2019 and March 31, 2020, respectively.
• The ACL to total nonperforming loans (“NPL”) was 165.3% as of June 30, 2020, as compared to 106.1% as of June 30, 2019, and 153.6% as of March 31, 2020.
• Total criticized loans (see Table 6) at June 30, 2020 were $1.0 billion or 7.37% of total loans as compared to $408.5 million or 3.00% at June 30, 2019 and $665.7 million or 4.97% at March 31, 2020. The linked quarter increase included net downgrades predominantly in Restaurant and Energy and to a lesser extent CRE credits, partially mitigated by net reductions in general C&I credits.

Total Revenue:

Total operating revenue(1) for the second quarter of 2020 was $184.7 million, down $7.8 million or 4.1% from the same period in 2019 and down $3.9 million or 2.1% from the linked quarter.

Net interest income Net interest income for the second quarter of 2020 was $154.7 million, a decrease of $6.1 million or 3.8% from the same period in 2019 and an increase of $1.2 million or 0.8% from the first quarter of 2020. The linked quarter increase resulted primarily from the ability of our lower deposit costs and hedging income to more than offset the impact of declines in LIBOR on our loan portfolio. Loan interest income, excluding accretion and PPP loans, declined $23.8 million during the quarter, and was more than offset by $16.6 million in lower deposit interest expense and $9.8 million in additional hedge income.

• We aggressively lowered our interest rates on deposits resulting in a 52% reduction in costs of total deposits to 0.46% for the quarter compared to 0.96% for the linked quarter. Additionally, noninterest-bearing deposits as a percent of total deposits increased significantly to 32.5% from 27.3% in the prior quarter. Total interest-bearing liabilities declined by 61 basis points to 0.78% from 1.39% in the first quarter of 2020.
• Hedge income and collar gain recognition for the second quarter of 2020 was $17.7 million as compared to $7.9 million for the first quarter of 2020.
• Accretion on acquired loans totaled $7.6 million for the second quarter of 2020, adding 17 basis points to the NIM as compared to $9.8 million and 23 basis point for the first quarter of 2020.
• Our NIM for the second quarter of 2020 was 3.51% as compared to 3.97% for the second quarter of 2019 and 3.80% for the first quarter of 2020.

PPP loans averaged $664 million in the second quarter at a yield of 2.38%, and along with cash in deposits associated with these loans, negatively impacted our second quarter NIM by 11 basis points. In addition to the impact of PPP loans, the second quarter 2020 NIM declined 8 basis points due to lower LIBOR and earning asset mix shifts, 6 basis points due to lower accretion, and 4 basis points due to excess liquidity as a result of fiscal stimulus and customer behavior. Specifically, the NIM change during the quarter included:

Noninterest income for the second quarter of 2020 was $30.0 million, a decrease of $1.8 million or 5.6% from the same period of 2019 and a decrease of $5.1 million or 14.6% from the linked quarter. Adjusted noninterest income(1) for the second quarter of 2020 was $27.7 million, a decrease of $3.6 million or 11.5% from the second quarter of 2019, and a decrease of $4.4 million or 13.8% from the linked quarter.

• The linked quarter results reflected slowed business activity as a result of COVID-19, including decreases in credit related fees, service charges on deposits, and $1.8 million in net writedowns on alternative investments. These impacts were partially offset by increases in investment advisory revenue and mortgage banking income given the robust related markets.
• Noninterest income as a percent of total revenue for the second quarter of 2020 was 16.2% as compared to 16.5% for the second quarter of 2019 and 18.6% for the linked quarter.

Noninterest expense (excluding goodwill impairment charge for first quarter 2020) for the second quarter of 2020 was $88.6 million, a decrease of $11.9 million or 11.8% from the same period in 2019 and a decrease of $5.3 million or 5.7% from the linked quarter. Adjusted noninterest expense(2), which excludes the impact of non-routine items(2), was $87.4 million, down $8.6 million or 8.9% from the second quarter of 2019 and down $5.1 million or 5.6% from the first quarter of 2020. Cadence has consistently demonstrated the ability to effectively manage expense levels in various economic environments, evidenced with the expense and efficiency declines this quarter. The linked quarter decrease in noninterest expenses (excluding the goodwill impairment charge) resulted from:

• Decrease of $1.6 million in personnel costs driven by reductions in regular compensation and employment taxes;
• $1.3 million less in merger related expenses;
• Decrease of $3.6 million in other expenses including: $0.8 million in special asset expenses; $0.7 million in travel expenses; $0.5 million in ATM and debit card expenses; and $0.5 million in operational losses; and
• Partially offset by an increase of $1.5 million in FDIC insurance assessment.

Adjusted efficiency ratio(1) for the second quarter of 2020 was 47.9%, improving from the linked quarter ratio of 49.9% with lower expenses and decreased from the prior year’s second quarter ratio of 50.0%.

Taxes:

The effective tax rate for the second quarter of 2020 was 10.6% compared to 7.7% for the linked quarter and 23.3% for the second quarter of 2019.

Dividend:

On July 21, 2020, the board of directors of Cadence Bancorporation approved a quarterly cash dividend in the amount of $0.05 per share of outstanding common stock, representing an annualized dividend of $0.20 per share. The dividend will be paid on August 7, 2020 to holders of record of Cadence’s Class A common stock on July 31, 2020.

Supplementary Financial Tables (Unaudited):

Supplementary financial tables (unaudited) are included in this release following the customary disclosure information.

Second Quarter 2020 Earnings Conference Call:

Cadence Bancorporation executive management will host a conference call to discuss second quarter 2020 results on Wednesday, July 22, 2020, at 7:30 a.m. CT / 8:30 a.m. ET. Slides to be presented by management on the conference call can be viewed by visiting www.cadencebancorporation.com and selecting “Events & Presentations” then “Presentations”.

Conference Call Access:

To access the conference call, please dial one of the following numbers approximately 10-15 minutes prior to the start time to allow time for registration and use the Elite Entry Number provided below.

For those unable to participate in the live presentation, a replay will be available through August 5, 2020. To access the replay, please use the following numbers:

Webcast Access:

The call and corresponding presentation slides will be webcast live on the home page of the Company’s website: www.cadencebancorporation.com.

About Cadence Bancorporation:

Cadence Bancorporation (NYSE: CADE), headquartered in Houston, Texas, is a regional financial holding company with $18.9 billion in total assets as of June 30, 2020. Its wholly owned subsidiary, Cadence Bank, N.A., operates 98 branch locations in Alabama, Florida, Georgia, Mississippi, Tennessee and Texas, and provides corporations, middle-market companies, small businesses and consumers with a full range of innovative banking and financial solutions. Services and products include commercial and business banking, treasury management, specialized lending, asset-based lending, commercial real estate, SBA lending, foreign exchange, wealth management, investment and trust services, financial planning, retirement plan management, payroll and insurance services, consumer banking, consumer loans, mortgages, home equity lines and loans, and credit cards. Clients have access to leading-edge online and mobile solutions, interactive teller machines, and more than 55,000 ATMs. The Cadence team of 1,800 associates is committed to exceeding customer expectations and helping their clients succeed financially.

Cautionary Statement Regarding Forward-Looking Information

This communication contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our results of operations, financial condition and financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict.

Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Such factors include, without limitation, the “Risk Factors” referenced in our Registration Statement on Form S-3 filed with the Securities and Exchange Commission (the “SEC”) on May 21, 2018, and our Registration Statement on Form S-4 filed with the SEC on July 20, 2018, other risks and uncertainties listed from time to time in our reports and documents filed with the SEC, including our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, and the following factors: business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic market areas; economic, market, operational, liquidity, credit and interest rate risks associated with our business; deteriorating asset quality and higher loan charge-offs; the laws and regulations applicable to our business; our ability to achieve organic loan and deposit growth and the composition of such growth; increased competition in the financial services industry, nationally, regionally or locally; our ability to maintain our historical earnings trends; our ability to raise additional capital to implement our business plan; material weaknesses in our internal control over financial reporting; systems failures or interruptions involving our information technology and telecommunications systems or third-party servicers; the composition of our management team and our ability to attract and retain key personnel; the fiscal position of the U.S. federal government and the soundness of other financial institutions; the composition of our loan portfolio, including the identity of our borrowers and the concentration of loans in energy-related industries and in our specialized industries; the portion of our loan portfolio that is comprised of participations and shared national credits; the amount of nonperforming and classified assets we hold; the extent of the impact of the COVID-19 pandemic on us and our customers, counterparties, employees, and third-party service providers, and the impacts to our business, financial position, results of operations, and prospects; the impact on our financial condition, results of operations, financial disclosures, and future business strategies related to the implementation of FASB Accounting Standards Update 2016-13, Financial Instruments – Credit Losses, commonly referred to as CECL. Cadence can give no assurance that any goal or plan or expectation set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements. The forward-looking statements are made as of the date of this communication, and Cadence does not intend, and assumes no obligation, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.

About Non-GAAP Financial Measures

Certain of the financial measures and ratios we present, including “efficiency ratio,” “adjusted efficiency ratio,” “adjusted noninterest expenses,” “adjusted operating revenue,” “tangible common equity ratio,” “tangible book value per share” and “return on average tangible common equity”, “adjusted return on average tangible common equity”, “adjusted return on average assets”, “adjusted diluted earnings per share”, and “pre-tax, pre-provision net revenue” are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis.

We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.

These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance. A reconciliation of non-GAAP financial measures to the comparable GAAP financial measures is included at the end of the financial statement tables (Table 10).