Cadence Bancorporation Reports First Quarter 2019 Financial Results

Cadence Bancorporation (NYSE:CADE) (“Cadence”) today announced net income for the quarter ended March 31, 2019 of $58.2 million, or $0.44 per diluted common share (“per share”), compared to $32.3 million, or $0.39 per share for the quarter ended December 31, 2018, and $38.8 million or $0.46 per share for the quarter ended March 31, 2018. The first quarter of 2019 included merger related expenses of $22.0 million or $0.13 per diluted common share.

“This has been an active and exciting quarter for Cadence. We finalized our merger with State Bank on January 1 and completed the systems and branding conversions during the quarter. I am pleased with our expanded footprint and the diversity it brings to our business model. We have seen numerous examples of great leadership from our bankers in Georgia, which we believe will lead to growing business opportunities throughout that market. It is nice to report a strong start to the year with better earnings than expected. On an adjusted basis, we earned $0.57 cents per share(1) which is a 19.7% adjusted return on tangible common equity(1); 1.72% adjusted return on assets(1); and a 45.7% adjusted efficiency ratio(1). Our credit metrics are positive also. We charged-off $550,000 or 2 basis points (annualized) for the quarter. Nonperforming assets declined to 0.63% at March 31 from 0.81% at fiscal year-end. Overall, it is a good start to the year,” stated Paul B. Murphy, Jr., Chairman and Chief Executive Officer of Cadence Bancorporation.

Highlights:

• Adjusted net income(1), excluding non-routine income and expenses(2) primarily related to the merger, was $75.0 million for the first quarter of 2019, an increase of $33.0 million or 79% compared to the first quarter of 2018 and an increase of $33.5 million or 81% compared to the fourth quarter of 2018.
• Adjusted EPS(1) for the first quarter of 2019 of $0.57 increased $0.07 compared to adjusted EPS for both the prior year and linked quarters of $0.50.
• Annualized returns on average assets, and tangible common equity(1) for the first quarter of 2019 were 1.34% and 15.54%, respectively, compared to 1.44% and 15.76%, respectively, for the first quarter of 2018, and 1.05% and 11.85%, respectively, for the fourth quarter of 2018.
  • Adjusted annualized returns on average assets(1) and adjusted tangible common equity(1) for the first quarter of 2019 were 1.72% and 19.69%, respectively, compared to 1.56% and 17.00%, respectively, for the first quarter of 2018 and 1.34% and 15.15%, respectively, for the fourth quarter of 2018.
• First quarter of 2019 efficiency ratio was 56.7% and the adjusted efficiency ratio(1) was 45.7%, resulting from strong revenue growth coupled with expense management.
• Nonperforming assets (“NPAs”) as a percent of total loans, OREO and other NPAs declined to 0.63% at March 31, 2019 compared to 0.84% and 0.81% at March 31, 2018 and December 31, 2018, respectively. Net charge-offs for the first quarter of 2019 were $550 thousand or 2 basis points on an annualized basis.

Balance Sheet:

Total assets were $17.5 billion as of March 31, 2019, an increase of $4.7 billion, or 37.1%, from December 31, 2018, and an increase of $6.5 billion, or 58.7%, from March 31, 2018.

Merger with State Bank Financial Corporation (“State Bank”). Effective January 1, 2019, State Bank merged into Cadence, with Cadence issuing 49.2 million shares to State Bank shareholders resulting in a total purchase price of $826 million. This merger added the additional assets and liabilities as shown in the table below, which included goodwill of $173.3 million, core deposit intangibles of $111.9 million or 3.28% of core deposits, an unfunded loan commitment mark of $26.8 million. The loan fair value adjustments totaled $99.0 million, made up of a credit risk adjustment of $71.2 million or 2.1% of total loans, and a market risk adjustment of $27.8 million. Note that the loan and unfunded commitment marks accrete into revenue and the core deposit intangible amortizes into expense over time as described in the footnotes below. The estimated fair values will be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period for a maximum of one year from consummation.

Fair Value Adjustments:

A. Represents the mark on the total balance of loans, which is comprised of a $20.3 million mark to the book balance on acquired credit impaired (“ACI”) loans and a $78.6 million mark on acquired non-credit impaired (“ANCI”) loans. Based on the expected cash flows, the ACI loans have an accretable difference of $43 million and will accrete into interest income over the expected life of the loan or pool of loans over approximately seven years. The $78.6 million mark on ANCI loans will accrete into interest income using either the effective yield or the straight-line method over the contractual lives of the loans, or approximately seven years.

B. Represents a core deposit intangible (“CDI”) of $111.9 million and a customer list intangible of $5.1 million. The CDI and customer list intangible amortize into interest expense and noninterest expense, respectively, using an accelerated method over a ten-year period.

C. Primarily represents $26.8 million as the fair value of unfunded loan commitments. The fair value for revolving lines and undrawn lines amortize using the straight-line method over the life of the loan, or approximately 48 months. The fair value of multi-advance loans amortizes using the effective yield method over the life of the loan, or approximately 29 months. Amortization of both of these adjustments do not begin until some or all the unfunded amount becomes funded.

D. Represents excess of purchase price over the combined fair value adjustments.

Loans. Loans at March 31, 2019 totaled $13.6 billion as compared to $8.6 billion and $10.1 billion at March 31, 2018 and December 31, 2018, respectively. Excluding the impact of the loans acquired from State Bank, loans increased $1.6 billion or 18.6% since March 31, 2018, and $245.9 million, or 2.4% from January 1, 2019 to March 31, 2019. These increases reflect continued organic demand.

Total deposits. Deposits at March 31, 2019 totaled $14.2 billion as compared to $9.0 billion and $10.7 billion at March 31, 2018 and December 31, 2018, respectively. Excluding the impact of deposits assumed from State Bank, deposits increased by $1.1 billion or 9.8% from March 31, 2018 and decreased by $606.1 million or 5.7% from December 31, 2018. The year-over- year deposit increase was driven by growth in core customer deposits (total deposits excluding brokered deposits) of $1.0 billion, or 12.4%, from March 31, 2018. The linked quarter decrease included a decline of core deposits of $424.4 million, or 3.2%, from December 31, 2018, which included $311.8 million that State Bank had on deposit at Cadence as noninterest-bearing deposits at December 31, 2018 that were eliminated out of deposits, as well as cyclical deposit declines typical in the first quarter of the year.

Shareholders’ equity was $2.3 billion at March 31, 2019, an increase of $945.6 million from March 31, 2018, and an increase of $864.5 million from December 31, 2018.

• Tangible common shareholders’ equity(1) was $1.7 billion at March 31, 2019, an increase of $670.5 million from March 31, 2018, and an increase of $576.5 million from December 31, 2018. The first quarter 2019 increase resulted from common stock issued of $826.1 million in the State Bank merger (net of issuance costs), net income of $58.2 million and an increase of $60.8 million in other comprehensive income which resulted from increased fair values of derivatives and of securities. These items were partially offset by an increase of $284.3 million in intangible assets, dividends of $22.7 million and the repurchase of 3.0 million common shares at an average price of $19.60 per share, or $58.8 million during the quarter as part of the share repurchase program announced in October 2018.
• Tangible book value per share(1) was $13.23 as of March 31, 2019, an increase of $0.91 from $12.32 as of March 31, 2018, and a decrease of $0.39 or from $13.62 as of December 31, 2018.
• Total outstanding shares in the quarter increased to 128.8 million shares due to the issuance of 49.2 million shares in connection with the State Bank merger, partially offset by the repurchase of 3.0 million shares during the quarter.

Asset Quality:

Credit quality reflected continued overall credit stability in the loan portfolio. For the quarter ended March 31, 2019, net charge-offs were $0.6 million or 2 basis points on an annualized basis, compared to $0.4 million or 2 basis points and $0.2 million or 1 basis point for the quarters ended March 31, 2018 and December 31, 2018, respectively.

• NPAs totaled $86.0 million, $72.7 million and $82.4 million as of March 31, 2019, March 31, 2018 and December 31, 2018, respectively. NPAs as a percent of total loans, OREO and other NPAs declined to 0.63% at March 31, 2019 compared to 0.84% and 0.81% at March 31, 2018 and December 31, 2018, respectively.
• The allowance for credit losses (“ACL”) was $105.0 million, or 0.77% of total loans, as of March 31, 2019, as compared to $91.5 million, or 1.06% of total loans, as of March 31, 2018, $94.4 million, or 0.94% of total loans, as of December 31, 2018. The decline in the percentage of the ACL to total loans is due to recording the State Bank $3.5 billion loan portfolio at fair value, which results in no ACL recorded for those loans upon merger.
• Loan loss provision was $11.2 million for the first quarter of 2019 compared to $4.4 million in the prior year’s quarter and $8.4 million in the linked quarter. The first quarter 2019 provision was driven by the quarter’s net loan growth and an increase in specific reserves for certain credits.

Total Revenue:

Total operating revenue(1) for the first quarter of 2019 was $200.0 million, up 72.2% from the same period in 2018 and up 61.1% from the linked quarter. The revenue increases reflect strong loan growth during the period as well as the impact of the State Bank acquisition.

Net interest income for the first quarter of 2019 was $169.3 million, an increase of $78.2 million or 85.8%, from the same period in 2018, and an increase of $66.1 million or 64.1%, from the fourth quarter of 2018. Our fully tax-equivalent NIM was up significantly in the first quarter of 2019 to 4.21% as compared to 3.64% for the first quarter of 2018 and 3.55% for the fourth quarter of 2018.

Earning asset yields for the first quarter of 2019 were 5.52%, up 101 basis points from 4.51% in the first quarter of 2018, and up 57 basis points from 4.95% in the fourth quarter of 2018. The current quarter’s increase in earning asset yields reflects the impact of the State Bank assets including purchase accounting accretion, combined with an increase in originated earning asset yields during the first quarter of 2019.

• Yield on originated loans increased to 5.46% for the first quarter of 2019, as compared to 4.79% and 5.20% for the first quarter of 2018 and fourth quarter of 2018, respectively.
• Approximately 69% of the total loan portfolio is floating at March 31, 2019. On February 28, 2019, Cadence entered into a $4.0 billion notional interest rate collar with a five-year term designed to reduce the impact of interest rate sensitivity of this portfolio. The yield on originated loans was impacted 1 basis point, (2) basis points and (9) basis points for the first quarter of 2019, first quarter of 2018 and fourth quarter of 2018, respectively, by the effect of our interest rate derivatives.
• Total accretion for ANCI loans was $12.5 million in the first quarter of 2019 compared to $0.2 million for the first quarter of 2018 and ($0.3) million for the fourth quarter of 2018. The first quarter 2019 accretion is predominantly related to loans acquired from State Bank.
• Total accretion for ACI loans was $6.3 million in the first quarter of 2019 compared to $5.6 million from the first quarter of 2018 and $5.6 million in the fourth quarter of 2018. The first quarter 2019 accretion includes $1.3 million related to loans acquired from State Bank.
• Total cost of funds for the first quarter of 2019 was 1.42% compared to 0.94% for the first quarter of 2018 and 1.51% in the linked quarter.
  • Total cost of deposits for the first quarter of 2019 was 1.30% compared to 0.75% for the first quarter of 2018, and 1.34% for the linked quarter.
  • The current quarter’s decrease in deposit costs reflected the impact of the State Bank deposits, partially offset by an approximate 12 bp increase in legacy deposit costs during the first quarter of 2019.

Noninterest income for the first quarter of 2019 was $30.7 million, an increase of $5.7 million or 22.7%, from the same period of 2018, and an increase of $9.7 million, or 46.0%, from the fourth quarter of 2018. Total service fees and revenue for the first quarter of 2019 were $27.9 million, an increase of $4.0 million or 16.9% from the same period of 2018, and an increase of $6.7 million or 31.7% from the fourth quarter of 2018. The year over year increase in fees was driven by:

• Increase of $1.1 million in service charges on deposits due primarily to the increase in number of deposit accounts.

• Increase of $1.3 million in credit related fees related to loan growth and leading loan transactions.
• New revenue sources of payroll processing and insurance ($1.9 million) and SBA income ($1.4 million) which resulted from the State Bank merger.
• Decrease of other service fees of $1.7 million due primarily to reduction in insurance revenue due to the sale of insurance company assets in the second quarter of 2018.

The linked quarter increase resulted primarily from:

• Increase of $1.3 million in service charges on deposits due to the increase in the number of deposit accounts, primarily from the State Bank merger.
• Increase of $1.1 million in bankcard fees which resulted from additional customers from the State Bank merger.
• Previously mentioned new revenue sources of payroll processing and insurance of $1.9 million and SBA income of $1.4 million.

Other noninterest income increased by $1.6 million from the first quarter of 2018 and by $2.9 million from the linked quarter. These increases resulted primarily from increases in BOLI income and earnings from limited partnerships, combined with stable net profits interest valuation in the first quarter of 2019, as compared to writedowns in the comparative quarters.

Noninterest expense for the first quarter of 2019 was $113.4 million, an increase of $51.5 million or 83.1% from $61.9 million for the same period in 2018, and an increase of $40.7 million or 56.0% from $72.7 million for the fourth quarter of 2018. The increase resulted primarily from:

• Merger related expenses of $22.0 million related to the State Bank merger
• Increase of $16.1 million and $10.0 million for the prior year period and linked quarter, respectively, in salaries and benefits due primarily to increased numbers of employees.
• Increase of $5.3 million and $5.5 million for the prior year period and linked quarter, respectively, in intangible asset amortization due to the amortization of the State Bank core deposit intangible asset.
• Increase of $5.5 million and $3.6 million for the prior year period and linked quarter, respectively, in other noninterest expenses due to business growth and the State Bank merger.

Adjusted noninterest expenses(1), which exclude the impact of non-routine items(2), were $91.4 million for the first quarter of 2019, up $33.1 million or 56.9% from $58.3 million for the first quarter of 2018 and up $30.6 million or 50.3% from $60.9 million for the fourth quarter of 2018. Non-routine expenses in the first quarter of 2019 comprised $22.0 million in State Bank merger related expenses. For the fourth quarter of 2018, non-routine expenses included $9.8 million in compensation expense and $2.0 million in merger related expenses. For the first quarter of 2018, non-routine expenses included $1.4 million in secondary offering expenses and $2.3 million in legacy acquired bank litigation costs.

Our efficiency ratio(1) for the first quarter of 2019 was 56.7% compared to 53.4% for the first quarter of 2018 and 58.6% for the fourth quarter of 2018. The efficiency ratio in all quarters was impacted by the noted non-routine expenses. Excluding non-routine revenues and expenses, the adjusted efficiency ratio(1) was 45.7%, 50.2%, and 49.0% for the first quarter of 2019, first quarter of 2018, and fourth quarter of 2018, respectively. The first quarter of 2019 adjusted efficiency ratio is reflective of efficiencies already gained through the State Bank merger, combined with strong revenue growth.

Taxes:

The effective tax rate for the quarter ended March 31, 2019, was 22.7% compared to 24.9% for the quarter ended December 31, 2018, and 22.0% for the quarter ended March 31, 2018.

Supplementary Financial Tables (Unaudited):

Supplementary Financial Tables (Unaudited) are included in this release following the customary disclosure information.

First Quarter 2019 Earnings Conference Call:

Cadence Bancorporation executive management will host a conference call to discuss first quarter 2019 results on Monday, April 29, 2019, at 12:00 p.m. CT / 1:00 p.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 May 13, 2019. To access the replay, please use the following numbers:

Webcast Access:

A webcast of the conference call presented by management can be viewed by visiting www.cadencebancorporation.com and selecting “Events & Presentations” then “Event Calendar.” Slides are available under the “Presentations” tab.

About Cadence Bancorporation

Cadence Bancorporation (NYSE: CADE), headquartered in Houston, Texas, is a regional financial holding company with $17.4 billion in assets as of March 31, 2019. Cadence 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, business insurance, 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 possibility that the anticipated benefits of the merger with State Bank are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where Cadence and State Bank do business. 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,” “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 earnings,” 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 7).

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