Cadence Bancorporation Reports Second Quarter 2019 Financial Results

Cadence Bancorporation (NYSE:CADE) (“Cadence”) today announced net income for the quarter ended June 30, 2019 of $48.3 million, or $0.37 per diluted common share (“per share”), compared to $48.0 million or $0.57 per share for the quarter ended June 30, 2018, and $58.2 million or $0.44 per share for the quarter ended March 31, 2019. The first and second quarters of 2019 included merger related expenses of $22.0 million or $0.13 per share and $4.6 million or $0.03 per share, respectively.

“The results for second quarter of 2019 reflect continued organic loan and deposit growth and solid fundamental trends, that were unfortunately negatively impacted by higher credit costs including net charge-offs of $18.6 million and loan provisions of $28.9 million. While the credit results are certainly disappointing, there have been many positive developments this year that add further strength to our platform. As a reminder, in the first quarter of 2019, we meaningfully diversified assets and deposits with the State Bank & Trust (“State Bank”) merger and protected our interest income with the addition of a well-timed interest rate collar. This quarter, we sold non-strategic acquired loans and grew originated loans 4.0% year-to-date, reflecting an intentional moderation of growth compared to prior years. Additionally, we further lowered our use of wholesale funding and enhanced our capital base while lowering ongoing debt as we refinanced senior debt with sub-debt on attractive terms. Our tangible book value per share increased over 7% from last quarter to $14.21. The State Bank merger integration continues to progress well on all fronts, and we are encouraged by our prospects to grow this core business throughout Georgia. We continue to focus on building our quality growth throughout our regional markets, while investing in scalable infrastructure to support ongoing customer service and profitable growth. Looking forward, we believe the cumulative effect of these actions position Cadence well for future success,” stated Paul B. Murphy, Jr., Chairman and Chief Executive Officer of Cadence Bancorporation.

Adjusted Performance Metrics:

• Adjusted net income(1), excluding non-routine income and expenses(2) primarily related to the merger, was $51.5 million for the second quarter of 2019, an increase of $9.3 million or 22.2% compared to the second quarter of 2018 and a decrease of $24.0 million or 31.8% compared to the first quarter of 2019.
• Adjusted EPS(1) for the second quarter of 2019 of $0.40 decreased by $0.10 compared to adjusted EPS for the prior year quarter of $0.50 and decreased by $0.18 for the linked quarter of $0.58.
• Annualized returns on average assets and tangible common equity(1) for the second quarter of 2019 were 1.10% and 12.23%, respectively, compared to 1.72% and 18.79%, respectively, for the second quarter of 2018, and 1.34% and 15.54%, respectively, for the first quarter of 2019.
  • Adjusted annualized returns on average assets(1) and adjusted tangible common equity(1) for the second quarter of 2019 were 1.17% and 12.96%, respectively, compared to 1.51% and 16.54%, respectively, for the second quarter of 2018 and 1.74% and 19.83%, respectively, for the first quarter of 2019.

Balance Sheet:

We continued to generate quality loan and deposit growth throughout our footprint during the quarter, bringing total assets to $17.5 billion as of June 30, 2019, an increase of $51.1 million or 0.3%, from March 31, 2019, and an increase of $6.2 billion or 54.8%, from June 30, 2018. The year-over-year increases throughout this release are impacted by the acquisition of State Bank which added $4.8 billion in total assets on January 1, 2019, and the linked quarter increase was softened by $164 million of loan sales as well as a $70 million decline in the securities portfolio due to portfolio rebalancing during the current quarter.

Loans. Loan balances for the second quarter of 2019 reflected conservative organic growth, with period-end balances lessened by $164 million of loan sales aimed at reducing certain risk profiles.

Loans at June 30, 2019 totaled $13.6 billion as compared to $9.0 billion and $13.6 billion at June 30, 2018 and March 31, 2019, respectively. Loans increased $1.5 billion or 16.4% since June 30, 2018, excluding the impact of the loans acquired from State Bank, and were essentially unchanged from March 31, 2019. The second quarter included a sale of certain equipment finance loans acquired through the State Bank merger, reducing loans by $130 million, as well as $34 million in non-core mortgage sales. The sales resulted in a gain of $1.9 million during the quarter. Excluding the impact of these sales, total loans grew $169 million or 1.0% during the second quarter of 2019. On a year-to-date basis, originated loans grew 4.0%, as compared to 8.8% year-to-date for 2018, reflecting management’s intentional efforts to moderate loan growth in 2019. The lower loan growth also reflects intentional movement away from targeted lending sectors and profiles.

Securities. Investment securities for the second quarter of 2019 declined modestly due to routine portfolio rebalancing that realized a net gain in the current quarter of $938 million. Investment securities at June 30, 2019 were $1.7 billion as compared to $1.0 billion at June 30, 2018 and $1.9 billion at March 31, 2019.

Funding. Our funding activities reflected strong performance this quarter with meaningful core deposits growth, further decline in period-end brokered deposits and wholesale funds, and successful execution of a subordinated debt offering allowing us to lower debt and interest costs while adding to our capital base.

Deposits at June 30, 2019 totaled $14.5 billion as compared to $9.3 billion and $14.2 billion at June 30, 2018 and March 31, 2019, respectively. Excluding the impact of deposits assumed from State Bank, deposits increased by $1.1 billion or 11.4% from June 30, 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 12.0%, from June 30, 2018. The linked quarter increase included an increase of $276 million, or 2.1% in core deposits, while brokered deposits were $868 million or 6.0% of total deposits at June 30, 2019. Additionally, on July 3, 2019, $228 million in brokered deposits matured that we don’t currently anticipate replacing in the latter half of 2019.

Total borrowings were $376 million at June 30, 2019 down from $471 million at June 30, 2018 and $717 million at March 31, 2019. The linked quarter decline was largely due to lower FHLB borrowings as a result of increased core deposits. Additionally, in June 2019, we paid off $145 million of senior debt yielding 4.875% with cash and proceeds from an $85 million subordinated debt offering. The subordinated debt has a ten-year maturity, is fixed rate for five years at 4.75% and qualifies for Tier 2 capital at the holding company.

Shareholders’ equity reflected a 5.4% growth during the second quarter of 2019 driven by increases in the value of our interest rate collar based on lower interest rate expectations, as well as net earnings for the quarter. Shareholder’s equity was $2.4 billion at June 30, 2019, an increase of $1.0 billion from June 30, 2018, and an increase of $123.2 million from March 31, 2019.

• Tangible common shareholders’ equity(1) was $1.8 billion at June 30, 2019, an increase of $756.2 million from June 30, 2018, and an increase of $126.3 million from March 31, 2019. The year over year increase resulted primarily from common stock issued of $826.1 million related to the merger with state Bank Financial Corporation. The linked quarter increase resulted from net income of $48.3 million and an increase of $95.3 million in other comprehensive income which resulted from increased fair values of derivatives and securities. These items were partially offset by dividends of $22.5 million.
• Tangible book value per share was $14.21 as of June 30, 2019, an increase of $1.36 from $12.85 as of June 30, 2018, and an increase of $0.98 from $13.23 as of March 31, 2019.
• Total outstanding shares at June 30, 2019 were 128.8 million.
• Total shareholders’ equity to total assets and tangible equity to tangible assets were 13.9% and 10.8%, respectively, at June 30, 2019.

Asset Quality:

Credit quality. Credit costs were elevated during the second quarter of 2019 as we experienced deterioration in certain credits resulting in charge-offs and increased loan provisions.

• Net charge-offs were $18.6 million compared to $2.2 million and $0.6 million for the quarters ended June 30, 2018 and March 31, 2019, respectively. On a year-to-date basis, 2019 charge offs are 0.28% of average loans as compared to 0.06% for the full year 2018 and 0.18% for the trailing four quarters. This quarter’s charge-offs were predominantly related to four credits, all previously designated as impaired. Three of the credits were general C&I and one restaurant.
• Loan loss provisions for the second quarter of 2019 were $28.9 million driven by higher charge-offs and specific reserves, as well as general credit migration primarily in the C&I portfolio. The allowance for credit losses (“ACL”) increased to $115.3 million or 0.85% of total loans as of June 30, 2019, as compared to $90.6 million or 1.01% of total loans as of June 30, 2018, and $105.0 million or 0.77% of total loans as of March 31, 2019.
• Loans 30-90 days past due remained low at 0.15% of total loans at June 30, 2019, down slightly from 0.16% at March 31, 2019.
• Nonperforming assets (“NPAs”) as a percent of total loans, OREO and other NPAs was 0.85% at June 30, 2019, compared 0.63% at both June 30, 2018 and March 31, 2019. NPAs totaled $116.4 million, $57.0 million and $86.0 million as of June 30, 2019, June 30, 2018 and March 31, 2019, respectively. The increase in NPAs in the second quarter of 2019 resulted from the addition of three loans totaling $30.9 million as nonaccrual loans, one energy, one restaurant and one general C&I.
• Total criticized loans as a percent of total loans at June 30, 2019 was 3.0% as compared to 3.7% at June 30, 2018 and 2.6% at March 31, 2019.

Total Revenue:

This quarter’s total operating revenue reflected stable underlying revenue driven by flat earning assets that, as compared to the linked quarter, was negatively impacted by timing of hedge income and lower accretion on acquired loans.

Total operating revenue(1) for the second quarter of 2019 was $192.5 million, up 60.3% from the same period in 2018 and down 3.7% from the linked quarter. On a year-to-date basis, operating revenue for the first half of 2019 was $392.5 million, up 66.1% from the same period in 2018. The year over year revenue increase reflects strong loan growth during the period as well as the impact of the State Bank acquisition.

Net interest income for the 2019 second quarter compared to the linked quarter reflected solid growth in both average loans and deposits with an expected modest increase in core deposit costs combined with a slightly softer originated loan yield (excluding hedge impacts). The margin was also impacted by timing of income related to our hedges and accretion.

Net interest income for the second quarter of 2019 was $160.8 million, an increase of $65.4 million or 68.6%, from the same period in 2018, and a decrease of $8.5 million or 5.0% from the first quarter of 2019.

• Our fully tax-equivalent net interest margin (“NIM”) increased in the second quarter of 2019 to 3.97% as compared to 3.66% for the second quarter of 2018 and declined from 4.21% for the first quarter of 2019.
• On a year-to-date basis, the NIM for 2019 increased to 4.09% compared to 3.65% for 2018.

The year-over-year increase in NIM reflects the merger with State Bank and the related positive impact on our funding costs, loan yields and accretion income. The NIM decline in the second quarter of 2019 as compared to the linked quarter was driven primarily by:

• -5 basis point (“bp”) from core deposit cost increases;
• -9 bp impact due to timing of interest rate hedge accounting adjustments; and
• -5 bp from lower net accretion from acquired loans.

Average earning assets for the second quarter of 2019 were $16.3 billion, an increase of $5.8 billion from the prior year’s quarter from both organic and acquired growth, and a decline of $0.1 billion from the linked quarter due to increases in average loans offset by lower short-term investments in the current quarter.

Originated Loans and Hedge Income:

• Average originated loans increased $233 million linked quarter, with year-over-year growth of $1.6 billion, reflecting solid quarterly growth, moderated from prior year as noted previously.
• Yield on originated loans was 5.43% for the second quarter of 2019, as compared to 5.02% and 5.61% for the second quarter of 2018 and the first quarter of 2019, respectively. Compared to the linked quarter, the yield was negatively impacted in the second quarter by timing related to our collar between the first and second quarters of 2019.
  • $4 billion notional collar: Hedge income for the collar for the second quarter of 2019 was ($1.7) million as compared to $1.7 million for the first quarter of 2019. The collar income year-to-date for 2019 was zero.
  • $650 million rate swaps: Hedge income for the swaps for the second quarter of 2019 was ($1.5) million as compared to ($1.2) million for the second quarter of 2018 and ($1.5) million for the first quarter of 2019. Swap income year-to-date for 2019 was ($3.0) million as compared to ($1.5) million for 2018.
• Yield on the underlying originated loans (excluding hedge impact) was 5.56% for the second quarter of 2019, as compared to 5.08% and 5.60% for the second quarter of 2018 and first quarter of 2019, respectively.
• Approximately 69% of the total loan portfolio is floating at June 30, 2019.

Acquired Loans:

• Acquired loan average balances declined $109.5 million during the second quarter of 2019 due to routine payoff activity, with the increase year-over-year due to the State Bank acquisition.
• Acquired loan yields during the second quarter of 2019 were impacted by various State Bank purchase accounting adjustments applied in the second quarter incorporating impact from January 1, 2019 (“Day 1”). The adjustments also included quarterly refinements of legacy acquired loan portfolio cash flows.
• Year-to-date 2019 yields are 10.14% on the ACI portfolio, excluding recovery accretion, and 6.59% on the ANCI portfolio. We currently expect that the year-to-date yields of the acquired portfolios, excluding recovery accretion, materially represent those portfolio’s inherent yields for the remainder of 2019, absent significant changes in payoff expectations, other currently unknown purchase accounting adjustments or changes in interest rate indices.

Cost of Funds:

• We experienced modest increases in funding costs this quarter with total cost of funds for the second quarter of 2019 of 1.50% compared to 1.18% for the second quarter of 2018 and 1.42% in the linked quarter. Total cost of deposits for the second quarter of 2019 was 1.39% compared to 0.98% for the second quarter of 2018, and 1.30% for the linked quarter.
• The increase in costs during the linked quarter related primarily to core deposit cost increases impacting both interest-bearing demand and time deposits related to the lagging beta impact from the 2018 rate increases. The cost of deposits was also negatively impacted by higher average wholesale funding balances related to seasonal deposit balances.
• Cost of funds for the latter half of 2019 will be positively impacted by the $60 million reduction in debt related to the June subordinated debt issuance and senior debt repayment, as well as the maturity of $228 million in brokered deposits on July 3, 2019.
• Noninterest-bearing deposits increased to 22.8% of total deposits compared to 22.6% at March 31, 2019.

Noninterest income for the second quarter of 2019 was $31.7 million, an increase of $7.1 million or 28.6% from the same period of 2018 due to broader growth and the State Bank merger, and an increase of $1.1 million or 3.5% over the linked quarter.

• Total service fees and revenue for the second quarter of 2019 were $27.9 million, an increase of $6.5 million or 30.3% from the same period of 2018, and an increase of $0.1 million or 0.5% from the first quarter of 2019. The year-over-year increase in fees was due to across the board business growth and the merger. The linked quarter results included business volume driven increases in investment advisory, trust, and credit-related fees, which were offset by declines in payroll processing (revenue cycle results in higher first quarter revenue), and service charges on deposit accounts.
• Other noninterest income was $3.8 million and increased by $0.1 million from the second quarter of 2018 and by $0.9 million from the linked quarter. The year over year variance included increases of $1.9 million in gain on sales of nonmortgage loans, $1.4 million in valuation of net profits interests and $2.8 million in gains on sales of securities, offset by the $4.9 million gain on sale of insurance subsidiary assets in the 2018 quarter, and a revaluation of an earnout receivable of $2.0 million related to the insurance asset sale in the current 2019 quarter. The linked quarter increase primarily resulted from the $1.9 million gain on sale of nonmortgage loans offset by the $2.0 million earnout receivable revaluation.
• Noninterest income as a percent of total revenues was 16.5% for the second quarter of 2019 compared to 20.6% and 15.3% for the second quarter of 2018 and first quarter of 2019, respectively.

Noninterest expense for the second quarter of 2019 declined compared to the linked quarter as merger costs materially declined during the second quarter, partially offset by an expected increase in broader operating costs associated with a larger company post-State Bank integration.

Noninterest expense for the second quarter of 2019 was $100.5 million, an increase of $38.1 million or 61.0% from $62.4 million for the same period in 2018, and a decrease of $12.9 million or 11.4% from $113.4 million for the first quarter of 2019. The linked quarter decrease resulted primarily from a decrease of $17.4 million in merger related expenses, partially offset by an increase of $4.5 million in operating expense.

The linked quarter decrease resulted from:

• Decrease of $17.4 million in merger related costs as both the merger date and systems integration took place in the first quarter of 2019;
• Increase of $1.8 million in technology costs associated with operating and processing a larger institution on a fully integrated basis;
• Increase of $1.4 million in business volume related expenses due to strong loan and deposit volumes;
• Increase of $0.7 million due to operational losses; and
• Increase of $0.4 million in loss on sale of other real estate.

Adjusted noninterest expenses(1), which exclude the impact of non-routine items(2), were $96.0 million for the second quarter of 2019, up $36.6 million or 61.6% from $59.4 million for the second quarter of 2018 and up $4.5 million or 5.0% from $91.4 million for the first quarter of 2019. Non-routine expenses for the second quarter and first quarter of 2019 consisted of $4.6 million and $22.0 million, respectively, in State Bank merger related expenses. For the second quarter of 2018, non-routine expenses included $1.2 million in secondary offering expenses, $0.8 million in merger related expenses, and $1.1 million in other expenses.

Our efficiency ratio(1) for the second quarter of 2019 reflects lower operating revenue combined with increases in quarterly operating expenses. The second quarter of 2019 efficiency ratio was 52.2% compared to 52.0% for the second quarter of 2018 and 56.7% for the first quarter of 2019. 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 50.0%, 50.7%, and 45.7% for the second quarter of 2019, second quarter of 2018, and first quarter of 2019, respectively.

Taxes:

The effective tax rate for the quarter ended June 30, 2019, was 23.3% compared to 22.7% for the quarter ended March 31, 2019, and 14.9% for the quarter ended June 30, 2018. The full year 2019 effective tax rate is currently estimated as 23.1%.

Supplementary Financial Tables (Unaudited):

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

Second Quarter 2019 Earnings Conference Call:

Cadence Bancorporation executive management will host a conference call to discuss second quarter 2019 results on Monday, July 22, 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 August 5, 2019. 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 $17.5 billion in assets as of June 30, 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, 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 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” 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 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).