Cadence Bank
NYSE:CADE
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Cadence Bank
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Welcome to the Cadence Bancorporation First Quarter 2021 Earnings Call. Comments are subject to the forward-looking statements disclaimer which can be found in the press release and on Page 2 of the financial results presentation.
Both of those documents can be located in the Investor Relations section at cadencebancorporation.com. All participants will be in listen-only mode. After management’s opening remarks, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Paul Murphy, Chairman and CEO. Please go ahead.
Good morning and thank you all for joining us. Joining me today on the call are Valerie Toalson, Sam Tortorici, Hank Holmes and Billy Braddock. As many of you know, we hosted a call announcing our merger with BancorpSouth on April the 12th. I would encourage investors to review that presentation to learn more about our strategy and the significant opportunity we see for our overall combined companies. For our call today, we are going to be focused on first quarter results.
So with that, let me give a couple of highlights. First off, I think it’s a solid quarter. Overall, I think there are three primary takeaways. The first is the Cadence continues to drive solid operating results and returns are adjusted pre-tax pre-provision, net revenue remained attractive at 86.4 million, or 1.86% of assets.
In my opinion, this is a nice reminder that our business model with a meaningful mix of C&I, just generate nice profitability. Our loan yields, excluding hedge and accretion declined slightly down seven basis points in the quarter.
Our cost of funds declined six basis points linked quarter. We earned $105 million for the quarter or 23% return on tangible common equity, which admittedly is elevated due to the reserve release.
Second takeaway for the quarter is that credit continues to improve across the board. Criticizing classified assets are still higher than we would like, but they are down materially from the peak of COVID, and now the lowest levels since March of 2019.
The $48 million negative provision is not a recurring item, I understand that. But I don’t want to brush over it, as it is really a strong indicator and a validating data point for the broad improvements we are seeing in credit.
So I would like to say that thinking back on 2020, the year was really about cadence and our borrowers working hard to de-risk and that the tone and the feel for 2021 is as much more about improving health of business activity.
The recovery of borrowers and operating cash flows. Our broader CNI portfolio has improved to really as for most banks. Our more COVID exposed portfolios, restaurant and hospitality have improved from last year and improved in the first quarter.
Non-performing loans declined over 11% linked quarter. Our reserves as percentage of non-performers now stand at 250% compared to 154% at the same time last year. Credit size assets have declined for another quarter.
The improvements that we are seeing here again are broad based across all aspects of our portfolio. The pool shrunk by 6.4% at linked quarter and finished the quarter 816 million. We are seeing improvement by upgrades and pay downs and restaurant energy, healthcare and hospitality. So to summarize, we are pleased with the results and credits for the first quarter, and we maintain a view that credit trends will continue to improve as the year progresses.
So last there is just more business confidence, increasing demand across our portfolio, everyday as vaccination rates increase, more companies or anticipating a normal operating environment, and it just sort of feels better out there. The underwriting environment has remained disciplined with regard to terms and structure.
Our pay downs slope to the lowest level and over a year. And as I mentioned really borrowers just seem more confident. We originated about a $1 billion in loan fundings in the quarter, driven primarily by great team of bankers or C&I, CRE portfolios were really the results that were most notable in the quarter. So as a result of all these things, I’m increasingly confident that we will see the accelerating loan growth in the second half of the year. We are pleased with the beginning of 2021.
So let me just emphasize a number of paths that cadence has to drive shareholder value. We are well capitalized and experienced motivated team of bankers. We operate some of the fastest growing markets in the United States. I think these factors are a powerful combination of factors to reflect on.
Of course, very importantly, the multiple layer of benefits, we see the strategic synergy that we can drive with BancorpSouth will only serve to accelerate, strengthen our ability to grow and deliver returns for shareholders, just since the announcement, really the excitement and enthusiasm, our team, our bankers on the assignment BancorpSouth, the communities we serve our customer reaction is just all been really consistently very, very positive.
So with that, I will pause and turn the call over to Valerie.
Thank you, Paul and good morning. For the first quarter our adjusted net income was 105 million or $0.83 per share down from the prior quarter adjusted net income of 200 million and $1.57 per share due to accelerated hedge revenue recognized in the fourth quarter, and the negative loan provision in the first quarter.
The first quarter allowance reflected a provision release of 48.3 million reflecting improvement in economic outlook and continued declines in criticize and nonperforming loans. Even with the reserve release this quarter, our allowance for credit losses remains robust at 2.49% or 2.67%, excluding PPP loans.
Turning to the balance sheet loans of 12.4 billion declined 354 million during the quarter, or 223 million excluding PPP loans. It is notable, however, that this quarter’s net reduction in loans was about a third of what it was in the fourth quarter as we are seeing a resurgence in loan pipelines again to pull through. Strategic reductions in the quarter included 33 million in restaurants, and 23 million in E&P pay downs.
Deposits of 16.1 billion were at 77 million during the quarter with 184 million growth in core deposits, partially offset by maturing brokered deposits. Or noninterest bearing deposits as a percent of total deposits increased over 34% at March 31st, up from 31% at year-end.
We continue to add to our 3.9 billion securities portfolio in the quarter up 600 million. Additionally, our balance sheet liquidity remains elevated with loans to deposits at 77% in cash balances of 1.9 billion.
Net interest income decreased by 14 million in the quarter to 143 million, reflecting lower hedge revenue fewer days in the quarter and balance sheet mix changes partially offset by lower funding costs.
It is important to remember the significance of our balance sheet liquidity. In the first quarter our cash balances averaged 2.2 billion yield is less than 15 basis points. Once we are able to effectively deploy this excess liquidity into earning assets, we do expect that to flow into interest income accordingly.
Net interest margin for the quarter declined by 32 basis points to 3.22%, again, largely driven by the decline in hedge revenue and excess balance sheet liquidity. Loan yields excluding hedge and accretion income were 3.91% in the first quarter, down seven basis points, while cost of deposits into the quarter at another record low of 20 basis points a decline of five basis points linked quarter. We also paid down 40 million of callable sub debt in March with an annual rate of 4.91%.
Adjusted noninterest income in the first quarter was 41.4 million, excluding the fourth quarter accelerated hedge revenue other noninterest income increased 2.2 million during the quarter as we saw nice results across the board with some linked quarter softness in mortgage and credit fees driven by volume.
Adjusted non-interest expenses were 98 million, down 7.5 million compared to the prior quarter. And with the adjusted efficiency ratio coming in as anticipated at 53%. Capital remains very strong with our common equity Tier 1 and Tier 1 ratios at 14.2% and total capital at 16.7%.
In summary, we are encouraged by our first quarter. Credit metrics reflected multiple facets of improvement. Loan pipelines are active across our footprint. Funding costs continue to decline and PPNR remains well above peer levels at 1.86% total assets.
Looking forward, given our excess liquidity strong capital level, attractive markets and motivated team, we are well positioned to capitalize on growth opportunities as the economy continues to improve.
With that, let me turn it back to the operator for questions.
We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Jennifer Gammal with Tourist Security. Please go ahead.
This is [Brandon] (Ph) keying on for Jennifer. Good morning. I was just curious [Technical Difficulty].
Brandon, I’m sorry. I could not understand you.
Could you repeat your question perhaps?
Sorry. Sorry. Sorry. Can you hear me now?
Yes.
Yes, I wanted to touch on the calling woods effort that you have mentioned previously. And I wanted to know, if you are seeing an increase from loan growth on that, and any other things you want to note about how that is going so far?
Hey Brandon, thanks, this is Hank and appreciate question. So, we have had a lot of success with our calling woods. We previously announced that we were hitting the ground in the first quarter. And I’m happy to say that we have had almost 9,000 touch points with our clients both on the commercial side and the retail side. This has led to obviously a lot of activity, a lot of communication with our clients and prospects.
And in turn, we have seen our pipelines increase. And we have also seen some increase in our loan committee and through our approval process. So this Blitz will continue and we are excited about it. And actually, with the announcement of the merger gives us another opportunity to go back and talk to our customers again, which in my opinion, drives business in our organization.
Thank you. And this is for Paul. Paul, what do you see as most challenging part of integrating with BancorpSouth in your mind?
Well thanks Brandon. I mean, conversions are never easy, I think, that will require a great deal of focus. And fortunately, we have two very experienced teams with a lot of conversion experience. So that will be extremely well planned, and thoroughly designed and tested, and it will be well executed I just got a lot of confidence in our team.
The great thing about it is that our culture and the philosophy of both banks are so similar, that it is just sets up for long-term success. I think conversions are never easy, so I’m not going to understate that. But we will get through it, and we will do well in an execution of that. And then just the more I get to know this team and the more time we spend together, that is just the better I feel about the outlook for the combination. So thank you for the question.
Thanks very much.
[Operator Instructions]
Well Andrew, we sort of thought that there would be a limited number of questions. I’m just going to see if Hank has any questions while we got.
No I’m good. You just guided about the quarter so.
Why don’t we Andrew just go ahead and wrap it up then. And I might just kind of parking back to some of my comments in the prepared remarks about tying into Brandon’s question about, the enthusiasm that we have around the combination with BancorpSouth.
The expansion of the branch network for our customers, so many more branches that they can access, places like Dallas and Austin, where we have limited access and just other markets. I mean the whole Georgia market for BancorpSouth customers it is a huge opportunity and, and a lot of growth there.
And as we sat on our April 12th call, our commercial banking expertise combined with their community banking. It is just the industrial logic, just really stacks up, and I think makes a lot of sense.
As Dan said, in our announcement call, mergers are really all about people. And I just wholeheartedly believe that both banks, we have two great teams of people and will very soon be all pulling together and the strengths of both organizations as I reflect on it leaves me very optimistic about our future together.
With that, we stand adjourned.
The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.