Cadence Bancorporation Reports Fourth Quarter and Full Year 2019 Financial Results

Cadence Bancorporation (NYSE: CADE) (“Cadence”) today announced net income for the year ended December 31, 2019 of $202.0 million or $1.56 per diluted common share (“per share”), compared to $166.3 million or $1.97 per share for the year ended December 31, 2018. Net income for the quarter ended December 31, 2019 was $51.4 million or $0.40 per share, compared to $32.3 million or $0.39 per share for the quarter ended December 31, 2018, and $44.0 million or $0.34 per share for the quarter ended September 30, 2019. Returns on average assets and tangible common equity(1) for 2019 were 1.14% and 12.40%, respectively, as compared to 1.45% and 15.93%, respectively, for 2018. Annualized returns on average assets and tangible common equity for the fourth quarter of 2019 were 1.14% and 11.82%, respectively, compared to 1.05% and 11.85%, respectively, for the fourth quarter of 2018 and 0.99% and 10.43%, respectively, for the third quarter of 2019.

“In 2019 we have a number of accomplishments to report. We grew and improved our deposit base, and we effectively managed our expenses and improved our net interest margin. The State Bank merger has gone well and provided us access to attractive markets. We have intentionally moderated our loan growth and have reduced exposure to higher risk components of our portfolio. Elevated credit costs during 2019 have obviously masked these efforts. Looking ahead, we expect to see improved credit results in 2020, and we remain confident our model will generate attractive returns for investors over time,” stated Paul B. Murphy, Jr., Chairman and Chief Executive Officer of Cadence Bancorporation.

Adjusted Performance Metrics (1):

• Adjusted net income(1), excluding non-routine income and expenses(2), was $223.1 million for the full year of 2019 compared to $174.8 million for 2018. For the fourth quarter of 2019, adjusted net income was $51.9 million, an increase of $10.4 million or 24.9% compared to the fourth quarter of 2018 and an increase of $7.8 million or 17.6% compared to the third quarter of 2019.
• Adjusted pre-tax pre-provision net earnings(1) for the full year 2019 was $400.3 million, compared to $241.8 million for the full year 2018. Adjusted pre-tax pre-provision net earnings in the fourth quarter of 2019 was $94.9 million, an increase of $31.5 million or 49.7% compared to the fourth quarter of 2018 and a decrease of $5.9 million or 5.9% compared to the third quarter of 2019.
• Adjusted EPS(1) for the full year 2019 was $1.72 compared to $2.07 for 2018. Adjusted EPS for fourth quarter of 2019 of $0.40 decreased from the prior year quarter of $0.50 and increased from the linked quarter of $0.34.
• Adjusted annualized returns on average assets(1) and adjusted tangible common equity(1) for the full year 2019 were 1.26% and 13.60%, respectively, compared to 1.52% and 16.74% for the full year 2018, respectively, and for the fourth quarter of 2019 were 1.16% and 11.93%, respectively, compared to 1.35% and 15.19%, respectively, for the fourth quarter of 2018 and 0.99% and 10.47%, respectively, for the third quarter of 2019.

Fourth Quarter 2019 Highlights:

Cadence’s fundamental operating performance during the fourth quarter of 2019 continued to reflect the strengths of the business model, partially offset by the elevated credit costs in the current quarter. Fourth quarter 2019 highlights (compared to the linked quarter) are as follows:

• Continued to grow core deposits, reaching $14.5 billion, an increase of $270.2 million or 1.9%, including an increase in noninterest bearing deposits of $230.8 million or 6.4%.
• Aggressively managed funding costs, with total cost of funds at 1.23% and total cost of deposits at 1.14%, representing declines of 18 basis points for each.
• Neutralized the effect of declining rates on our earning assets through the impact of our hedging and deposit cost management. Net interest margin (“NIM”) was 3.89%, a decline of 5 basis points or 1.3% due to a balance shift from loans to securities, impact of nonaccrual loans and accretion. Net interest spread increased 1 basis point to 3.41%.
• Continued focus on prudent expense management, with an adjusted efficiency ratio(1) of 50.9%.
• Strong operating performance produced a solid 1.16% adjusted return on average assets and 11.93% adjusted return on tangible common equity, even with elevated credit costs during the quarter.
• Ended 2019 with a well-positioned balance sheet reflecting increased liquidity, lower risk weighted assets, a strong capital base and meaningful fundamental earnings power throughout our business lines.

Balance Sheet:

Total assets were $17.8 billion as of December 31, 2019, an increase of $5.1 billion or 39.7% from December 31, 2018, and a decrease of $70.5 million or 0.4% from September 30, 2019. The year-over-year increases throughout this release are impacted by the acquisition of State Bank Financial Corporation (“State Bank”), which added $4.8 billion in total assets on January 1, 2019. Excluding the impact of the assets acquired from State Bank, total assets during 2019 increased $31.8 million or 0.3% from 2018.

Loans at December 31, 2019 totaled $13.0 billion as compared to $10.1 billion at December 31, 2018, an increase of $2.9 billion or 29.1%. Excluding the impact of the loans acquired from State Bank, loans decreased $387.3 million or 3.9% since December 31, 2018. Loans decreased $653.4 million or 4.8% from $13.6 billion at September 30, 2019. The declines in loan balances reflect management’s efforts to reduce portfolio risk and moderate loan growth, combined with higher payoff activity and charge-offs. Additionally, the declines included loans sold or transferred to the period end loans held-for-sale portfolio of $124.0 million for the full year 2019 and $96.0 million for the fourth quarter 2019.

Investment Securities at December 31, 2019 totaled $2.4 billion or 13.3% of total assets as compared to $1.2 billion or 9.3% of total assets at December 31, 2018, an increase of $1.2 billion or 99.5%. Excluding the impact of the securities acquired from State Bank, investment securities increased $513.5 million or 43.2% since December 31, 2018. Investment securities for the fourth quarter of 2019 increased $663.3 million from $1.7 billion, or 9.6% of total assets at September 30, 2019. The increase in investment securities is a result of strong deposit growth combined with lower loan balances.

Funding activities continued to reflect strong performance, with meaningful core deposit growth, improved deposit mix and further decline in period-end brokered deposits.

Total deposits at December 31, 2019 totaled $14.7 billion as compared to $10.7 billion at December 31, 2018, an increase of $4.0 billion or 37.7%. Excluding the impact of deposits assumed from State Bank, core customer deposits (total deposits excluding brokered deposits) increased $779.7 million or 8.1% from December 31, 2018, offset by a decrease of $842.3 million in brokered deposits. The linked quarter change in total deposits included an increase of $270.2 million or 1.9% in core deposits, while brokered deposits declined by $317.1 million. Brokered deposits represented 1.3% of total deposits at December 31, 2019 compared to 9.7% at December 31, 2018 and 3.5% at September 30, 2019.

Total borrowings were $372.2 million at December 31, 2019, down from $471.8 million at December 31, 2018 and up slightly from $371.9 million at September 30, 2019. The year-over-year decline was largely due to lower FHLB borrowings as a result of increased core deposits, as well as a decline of approximately $50 million in long-term debt in the second quarter of 2019.

Shareholders’ equity was $2.5 billion at December 31, 2019, an increase of $1.0 billion or 71.1% from December 31, 2018, and decreased slightly, $15.1 million or 0.6%, from September 30, 2019. Tangible common shareholders’ equity(1) was $1.9 billion at December 31, 2019, an increase of $746.0 million from December 31, 2018 and a decrease of $8.6 million from September 30, 2019. The year-over-year increase resulted primarily from issuance of common stock of $826.1 million related to the merger with State Bank, $202.0 million in 2019 net income, $157.6 million increase in other comprehensive income largely driven by the value of our interest rate collar put in place in the first quarter of 2019, partially offset by $90.1 million in cash dividends, $79.1 million related to common share buybacks, and an increase of $276.5 million in total intangible assets. The linked quarter decrease resulted from net income of $51.4 million offset by dividends on common stock of $22.4 million, a decrease of $35.7 million in other comprehensive income due to decreased fair values of derivatives and securities, a decrease of $6.5 million in intangible assets, and $9.8 million in common share repurchases.

• Tangible book value per share(1) was $14.65 as of December 31, 2019, an increase of $1.03 from $13.62 as of December 31, 2018 and a decrease of $0.01 from $14.66 as of September 30, 2019.
• Total outstanding shares at December 31, 2019 were 127.6 million. Cadence repurchased $9.8 million of common stock at an average price per share of $16.21 during the quarter and $79.1 million at an average price of $18.49 during the full year 2019.
• Total shareholders’ equity to total assets and tangible equity to tangible assets were 13.8% and 10.9%, respectively, at December 31, 2019 compared to 11.3% and 9.1% at December 31, 2018, respectively.

Asset Quality:

Credit quality metrics were elevated during 2019 as certain of our borrowers, predominantly in the Restaurant, Energy, and General C&I categories, experienced increased credit stress compared to our historical experience and long-term expectations.

• Provision for credit losses for the full year 2019 was $111.0 million or 0.81% annualized of average loans as compared to $12.7 million or 0.14% annualized of average loans for 2018. Provision for the fourth quarter of 2019 was $27.1 million or 0.80% annualized of average loans as compared to $8.4 million or 0.34% annualized of average loans for the fourth quarter of 2018 and $43.8 million or 1.27% annualized of average loans for the third quarter of 2019. The current quarter’s provision was driven primarily by higher charge-offs and specific reserves.
• Net charge-offs for the full year 2019 were $85.8 million or 0.63% annualized of average loans as compared to $5.9 million or 0.06% annualized for the full year 2018. For the fourth quarter 2019, net charge-offs were $35.3 million or 1.04% annualized of average loans compared to $0.2 million or 0.01% annualized and $31.3 million or 0.91% annualized for the quarters ended December 31, 2018 and September 30, 2019, respectively. The current quarter charge-offs included $15.0 million in five restaurant credits, $7.7 million in three general C&I credits, $7.5 million in three energy credits and $4.3 million in three acquired credits.
• The allowance for credit losses (“ACL”) was $119.6 million or 0.92% of total loans as of December 31, 2019, as compared to $94.4 million or 0.94% of total loans as of December 31, 2018, and $127.8 million or 0.94% of total loans as of September 30, 2019.
• The ACL to total nonperforming loans was 100.1% as of December 31, 2019, as compared to 127.1% as of December 31, 2018, and 118.2% as of September 30, 2019.
• Loans 30-89 days past due were 0.17% of total loans at December 31, 2019, compared to 0.06% at December 31, 2018 and 0.15% at September 30, 2019.
• Nonperforming loans (“NPL”) as a percent of total loans were 0.92% at December 31, 2019, compared to 0.74% at December 31, 2018 and 0.79% at September 30, 2019. NPL totaled $119.6 million, $74.2 million and $108.1 million as of December 31, 2019, December 31, 2018 and September 30, 2019, respectively.
• Total criticized loans (see Table 6) at December 31, 2019 were $605.1 million or 4.66% of total loans as compared to $259.9 million or 2.58% at December 31, 2018 and $571.9 million or 4.19% at September 30, 2019. The linked quarter increases included migration of certain general C&I credits.

Total Revenue:

Total operating revenue(1) for 2019 was $782.1 million, up 62.1% from 2018 reflective of the business growth during the period as well as the impact of the State Bank acquisition. Total operating revenue(1) for the fourth quarter of 2019 was $194.8 million, up 56.9% from the same period in 2018 and flat as compared to $194.8 million in the linked quarter.

Net interest income for the full year 2019 was $651.2 million as compared to $387.7 million for 2018, an increase of 68.0%. Net interest income for the fourth quarter of 2019 was $160.9 million, an increase of $57.8 million or 56.0%, from the same period in 2018 and an increase of $0.7 million or 0.5% from the third quarter of 2019.

• Our fully tax-equivalent NIM (“NIM”) for 2019 increased to 4.00% compared to 3.61% for 2018. Our net interest spread for 2019 increased to 3.48% as compared to 3.17% for 2018.
• NIM in the fourth quarter of 2019 was 3.89% as compared to 3.55% for the fourth quarter of 2018 and 3.94% for the third quarter of 2019.
• Net interest spread in the fourth quarter of 2019 increased to 3.41% as compared to 3.05% for the fourth quarter of 2018 and 3.40% for the third quarter of 2019.

The year-over-year increase in NIM reflects the merger with State Bank as well as other positive impacts from changes in our balance sheet mix, derivative activities, funding costs, loan yields and accretion income. The fourth quarter 2019 NIM as compared to the linked quarter was down only 5 basis points as we effectively mitigated the impact of declining rates on our loan portfolio and lower loan balances by aggressively managing funding costs and realizing the positive impact of our hedge positions. Specifically, the NIM change during the quarter included:

The impact of the changes in yields and costs on our balance sheet included the following highlights:

• Yield on the underlying originated and ANCI loans (excluding accretion) was 5.18% for the fourth quarter of 2019, as compared to 5.21% and 5.29% for the fourth quarter of 2018 and the third quarter of 2019, respectively. Approximately 67% of the total loan portfolio is floating at December 31, 2019. The declines in interest rates drove the declines in yields and impact on margin during the fourth quarter of 2019.
• The negative impact of declining rates on our loan yields was partially offset by the positive impact of our hedges linked quarter:
  • $4 billion notional LIBOR collar: Hedge income for the collar for the fourth quarter of 2019 was $6.9 million as compared to $2.7 million for the third quarter of 2019. The collar income year-to-date for 2019 was $9.6 million. The collar contract expires February 2024.
  • Rate swaps: Swap income (loss) for the fourth quarter of 2019 was ($0.5) million as compared to ($2.0) million for the fourth quarter of 2018 and ($1.2) million for the third quarter of 2019. Swap income year-to-date for 2019 was ($4.7) million as compared to ($5.2) million for 2018. One swap contract for $300 million expired on December 31, 2019, with the remaining $350 million contract expiring February 27, 2026.
• Loan fees also served to positively impact total loan yields, impacted by heightened payoffs during the fourth quarter of 2019.
• Funding costs declined meaningfully this quarter with total cost of funds for the fourth quarter of 2019 of 1.23% compared to 1.51% for the fourth quarter of 2018 and 1.41% in the linked quarter. Total cost of deposits for the fourth quarter of 2019 was 1.14% compared to 1.34% for the fourth quarter of 2018 and 1.32% for the linked quarter.

Other impacts to NIM included:

• The balance shift of average earning assets during the fourth quarter of 2019 negatively impacted NIM by 3 basis points as average loans declined $295.8 million and average investment securities and other short-term investments increased $541.4 million as compared to the linked quarter due to reinvestment of net liquidity into investment securities. Our funding mix improved during the fourth quarter of 2019, with brokered deposits declining by $317.1 million and core deposits increasing by $270.2 million, positively impacting NIM by 1 basis point.
• Declines in accretion during the fourth quarter 2019 negatively impacted NIM by 1 basis point. Total accretion for the fourth quarter of 2019 was $18.5 million and included $1.9 million of recovery income. Total accretion for the third quarter of 2019 was $18.5 million and included $0.6 million of recovery income.
• The impact of increased nonaccrual loans during the quarter was a negative 2 basis points.

Noninterest income for the full year of 2019 was $130.9 million, an increase of $36.3 million or 38.3% from 2018. Noninterest income for the fourth quarter of 2019 was $33.9 million, an increase of $12.9 million or 61.4% from the same period of 2018 and a decrease of $0.7 million or 2.1% over the linked quarter.

• The year-over-year increase was due to across-the-board business growth and the merger. The linked quarter results included a decline in credit related fees resulting from decreased loan activity, timing on service charges and lower securities gains, offset by increases in investment advisory revenue, trust services revenue and payroll processing revenue.
• Noninterest income as a percent of total revenue for 2019 was 16.7% as compared to 19.6% for 2018, and was 17.4% for the fourth quarter of 2019 compared to 16.9% and 17.8% for the fourth quarter of 2018 and third quarter of 2019, respectively.

Noninterest expense for the full year of 2019 was $408.8 million, an increase of $150.5 million or 58.3% from 2018. Noninterest expense for fourth quarter of 2019 was $100.5 million, an increase of $27.8 million or 38.3% from the same period in 2018 and an increase of $6.2 million or 6.6% from the third quarter of 2019.

Adjusted noninterest expense(1), which excludes the impact of non-routine items(2), was $379.0 million for the full year of 2019, an increase of $141.5 million or 59.6% from 2018. For the fourth quarter of 2019, adjusted noninterest expense was $98.4 million, up $37.5 million or 61.6% from $60.9 million for the fourth quarter of 2018 and up $5.1 million or 5.5% from $93.3 million for the third quarter of 2019. Non-routine expenses included merger-related and other expenses of $29.7 million and $20.8 million for the full years 2019 and 2018, respectively, and $2.1 million, $11.8 million and $1.0 million for the fourth quarter of 2019, fourth quarter of 2018 and third quarter of 2019, respectively. The year-over-year increase of adjusted noninterest expense was related to the State Bank acquisition. The linked quarter increase resulted from:

• Increase of $1.7 million in personnel costs related to increased operating compensation and the impact of the reductions in incentive in the third quarter 2019;
• Increase of $1.6 million in loan-related expenses due to the net credit reflected in the third quarter of 2019;
• Increase of $0.7 million in FDIC insurance assessment due to incremental credits received in the third quarter for assessments paid prior to reaching $10 billion in total assets;
• Increase of $0.9 million in consulting and professional fees including IT, legal, accounting and audit services;
• Increase of $0.7 million in premises and equipment due to timing of routine repairs and maintenance expenses on buildings and equipment; and
• Increase of $0.4 million in advertising and public relations due to seasonal activity and greater focus in Atlanta.

Our adjusted efficiency ratio(1) for the full year of 2019 was 48.6% as compared to 49.6% for 2018, reflecting efficiencies from the State Bank acquisition combined with continued focus on an efficient operating platform. The adjusted efficiency ratio for the fourth quarter of 2019 of 50.9% declined slightly from both linked and prior year quarter ratios of 48.1% and 49.0%, respectively, due to flat revenue combined with anticipated modest expense increases in the quarter.

Taxes:

The effective tax rate for the full year 2019 was 23.0% as compared to 21.3% for the full year 2018. The effective tax rate for the quarter ended December 31, 2019 was 23.4% compared to 22.5% for the quarter ended September 30, 2019 and 24.9% for the quarter ended December 31, 2018.

Supplementary Financial Tables (Unaudited):

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

Fourth Quarter 2019 Earnings Conference Call:

Cadence Bancorporation executive management will host a conference call to discuss fourth quarter and year end 2019 results on Thursday, January 23, 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 February 6, 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 $17.8 billion in total assets as of December 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, 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 impact on our financial condition, results of operations, financial disclosures, and future business strategies related to the upcoming 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 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 10).